Chapter 33: The Means of Circulation under the Credit System

This should be taken in a double sense. On the one hand, all methods that save means of circulation are founded on credit. Secondly, however, let us take a £500 note. Say that A gives this to B today in payment for a bill of exchange; B deposits it the same day with his banker; the latter uses it still the same day to discount a bill for C; C pays it into his bank, this bank gives it to the billbroker as an advance, etc. The speed with which the note circulates here, serving to make purchases or payments, is mediated by the speed with which it returns time after time to someone or other in the form of a deposit and is transferred to someone else in the form of a loan. Pure economizing on means of circulation appears in its most highly developed form in the clearing house, the simple exchange of bills falling due, where the principal function of money as means of payment is simply to settle the balances. But the existence of these bills of exchange itself depends on the credit that the industrialists and merchants give one another. If this credit declines, so does the number of bills, particularly the long-term ones, and so too therefore does the effectiveness of this method of settlement. And this economy that consists in the removal of money from transactions and depends entirely on the function of money as means of payment, depending in turn on credit, must be one of two kinds (apart from the greater or lesser development of technique in the concentration of these payments): reciprocal claims, represented by bills of exchange or cheques, are balanced by the same banker, who simply transfers the claim from one person’s account to the other’s; or else the various bankers settle them among themselves.11 The concentration of £8–£10 million in bills of exchange in the hands of a billbroker, such as the firm of Overend, Gurney& Co., was one of the principal means for expanding the scope of this settlement at the local level. By this kind of economizing, the effectiveness of the means of circulation is increased, in so far as a smaller quantity is required simply to settle the balance. The velocity of the money circulating as means of circulation, on the other hand (which can also be economized on), depends entirely on the flow of purchases and sales, or else on the interlinking of payments, in so far as these follow successively in money. But in this way credit mediates and increases the velocity of circulation. The individual piece of money may effect only five transactions, for instance, remaining for longer in each individual hand – as a mere means of circulation without the intervention of credit – if A, its original owner, buys from B, B from C, C from D, D from E, and E from F, i.e. if its transition from one hand to the other is mediated simply by actual purchases and sales. But if B deposits the money received in payment from A with his banker, who passes it to C in discounting a bill of exchange, C buying from D, D depositing it with his banker and the latter lending it to E, who buys from F, then even its velocity as a mere means of circulation (means of purchase) is mediated by several credit operations: B’s depositing with his banker and the latter’s discounting for C, D’s depositing with his banker and the latter’s discounting for E; four credit operations in all. Without these credit operations, the same piece of money would not have performed five purchases successively in a given period of time. The fact that it changed hands without the mediation of actual purchase and sale – as a deposit and by discounting – means that its change of hands in the series of real transactions is accelerated.

The following table shows the yearly average of Bank of England notes in the hands of the public, subdivided into the totals for £5 and £10 notes, notes of £20 to £100, and of £200 to £1,000; also the percentage of the total circulation that was supplied by each of these categories. The totals are in thousands, the last three figures having been deleted.

Year	£5–10 notes	%	£20–100 notes	%	£200–1,000 notes	%	Totals in £
1844	9,263	45.7	5,735	28.3	5,253	26.0	20,241
1845	9,698	46.9	6,082	29.3	4,942	23.8	20,722
1846	9,918	48.9	5,778	28.5	4,590	22.6	20,286
1847	9,591	50.1	5,498	28.7	4,066	21.2	19,155
1848	8,732	48.3	5,046	27.9	4,307	23.8	18,085
1849	8,692	47.2	5,234	28.5	4,477	24.3	18,403
1850	9,164	47.2	5,587	28.8	4,646	24.0	19,398
1851	9,362	48.1	5,554	28.5	4,557	23.4	19,473
1852	9,839	45.0	6,161	28.2	5,856	26.8	21,856
1853	10,699	47.3	6,393	28.2	5,541	24.5	22,653
1854	10,565	51.0	5,910	28.5	4,234	20.5	20,709
1855	10,628	53.6	5,706	28.9	3,459	17.5	19,793
1856	10,680	54.4	5,645	28.7	3,323	16.9	19,648
1857	10,659	54.7	5,567	28.6	3,241	16.7	19,467

(B A. 1858, p. xxvi)

The total sum of banknotes in circulation thus underwent a positive decline between 1844 and 1857, even though trade more than doubled, as is shown by the export and import figures. Low denomination notes of £5 and £10 increased, as the table shows, from £9,263,000 in 1844 to £10,659,000 in 1857. And this went parallel with the increase in gold circulation which was so marked at this very time. Notes of higher denominations (£200 to £1,000), on the other hand, declined from £5,856,000 in 1852 to £3,241,000 in 1857, a decline of more than £2 1/2 million. This has been explained as follows: ‘On the 8th June 1854, the private bankers of London admitted the joint-stock banks to the arrangements of the clearing house, and shortly afterwards the final clearing was adjusted in the Bank of England. The daily clearances are now effected by transfers in the accounts which the several banks keep in that establishment. In consequence of the adoption of this system, the large notes which the bankers formerly employed for the purpose of adjusting their accounts are no longer necessary’ (B. A. 1858, p. v).

The low minimum to which the use of money in wholesale trade has been reduced can be seen by comparing the table reproduced in Volume 1, Chapter 3, p. 238, note 54, which was submitted to the Bank Acts Committee by Morrison, Dillon & Co., one of the largest of those London wholesalers where a retail trader can purchase his entire stock of commodities of all kinds.

According to the evidence of W. Newmarch (B. A. 1857, no. 1741), other factors also contributed to the saving on means of circulation: the penny post, railways, telegraphs, in short the improved means of communication; so that England can do approximately five or six times the amount of business with the same note circulation. This however is said to be essentially due to the withdrawal of notes of more than £10 from circulation. This seems to him a natural explanation for the fact that in Scotland and Ireland, where £1 notes also circulate, the note circulation has risen by approximately 31 per cent (1747). The total circulation of banknotes in the United Kingdom, including these £1 notes, is £39 million (1749). The gold circulation is £70 million (1750). In Scotland the note circulation in 1834 was £3,120,000; in 1844, £3,020,000; in 1854, £4.050,000 (1752).

It already emerges from this that it is in no way in the power of the note-issuing banks to increase the number of notes in circulation, as long as these notes are exchangeable at any time against metal money. (Marx is not referring at all here to inconvertible paper money; inconvertible banknotes can become general means of circulation only where they are in actual fact supported by the state’s credit, as is the case today in Russia, for example. These therefore fall under the laws of inconvertible state paper money, as already developed: Volume 1, Chapter 3, 2, c: ‘Coin. The Symbol of Value’. – F. E.)

The amount of notes in circulation is governed by the needs of commerce, and each superfluous note immediately finds its way back to its issuer. Since in England it is only the notes of the Bank of England that enjoy general circulation as legal tender, we can ignore here the insignificant and simply local note circulation of the provincial banks.

Before the Bank Acts Committee of 1858, Mr Neave, Governor of the Bank of England, gave the following evidence: ‘947. (Question:) Whatever measures you resort to, the amount of notes with the public, you say, remains the same; that is somewhere about £20,000,000? – In ordinary times, the uses of the public seem to want about £20,000,000. There are special periodical moments when, through the year, they rise to another £1,000,000 or £1,500,000. I stated that, if the public wanted more, they could always take it from the Bank of England.’ – ‘948. You stated that during the panic the public would not allow you to diminish the amount of notes; I want you to account for that. – In moments of panic, the public have, as I believe, the full power of helping themselves as to notes; and of course, as long as the Bank has a liability, they may use that liability to take the notes from the Bank.’ – ‘949. Then there seems to be required, at all times, somewhere about £20,000,000 of legal tender? – £20,000,000 of notes with the public; it varies. It is £18,500,000, £19,000,000, £20,000,000, and so on; but taking the average, you may call it from £19,000,000 to £20,000,000.’

Evidence of Thomas Tooke to the House of Lords Committee on Commercial Distress (C. D. 1848–57), no. 3094: ‘It has no power of its own volition to extend the amount of its circulation in the hands of the public; but the Bank has the power of reducing the amount of the notes in the hands of the public, not however without a very violent operation.’

J. C. Wright, banker in Nottingham for thirty years, says this of the Bank of England notes, after explaining in detail how it is impossible for the provincial banks to keep in circulation more notes than the public need and want at the time (C. D. 1848–57, no. 2844): ‘I am not aware that there is any check upon the Bank of England’ (in respect of note issue) ‘but any excess of circulation will go into the deposits and thus assume a different name.’

The same holds true for Scotland, where there is almost nothing but paper in circulation, since there as in Ireland £1 notes are also permitted, and ‘the Scotch hate gold’. Kennedy, director of a Scottish bank, declares that the banks could never reduce their note circulation and ‘conceives that so long as there are internal transactions requiring notes or gold to perform them, bankers must, either through the demands of their depositors or in one shape or another, furnish as much currency as those transactions require… The Scottish banks can restrict their transactions, but they cannot control their currency’ (ibid., nos. 3446,3448).

Likewise Anderson, director of the Union Bank of Scotland, ibid., no. 3578: ‘The system of exchanges between yourselves’ (among the Scottish banks) ‘prevents any over-issue on the part of any one bank? – Yes; there is a more powerful preventive than the system of exchanges’ (which has really nothing to do with this, but does indeed guarantee the ability of the notes of each bank to circulate throughout Scotland), ‘the universal practice in Scotland of keeping a bank account; everybody who has any money at all has a bank account and puts in every day the money which he does not immediately want, so that at the close of the business of the day there is no money scarcely out of the banks except what people have in their pockets.’

The same also applies to Ireland, viz. the evidence of the Governor of the Bank of Ireland, MacDonnell, and the director of the Provincial Bank of Ireland, Murray, before the same committee.

The note circulation is not only independent of the will of the Bank of England, it is equally independent of the state of the gold reserve in the Bank’s vaults, which is what ensures the convertibility of these notes.

‘On September 18, 1846, the circulation of the Bank of England was £20,900,000 and the bullion in the Bank £16,273,000; and on April 5, 1847, the notes in circulation were £20,815,000 and the bullion £10,246,000… It is evident that £6 million of gold were exported, without any contraction of the currency of the country’ (J. G. Kinnear, The Crisis and the Currency, London, 1847, p. 5).

Naturally this holds good only under the conditions prevailing in England today, and even then only in so far as legislation does not enforce a different ratio between note issue and metal reserve.

So it is simply the needs of business itself that exert an influence on the quantity of money in circulation – notes and gold. The first thing to be considered here are the periodic fluctuations that repeat themselves each year, whatever the general state of business might be, so that for twenty years past, ‘the circulation is high in one month, and it is low in another month, and in a certain other month occurs a medium point’ (Newmarch, B. A. 1857, no. 1650).

Thus in August of each year a few £ millions, mostly in gold, pass from the Bank of England into domestic circulation, to pay for the costs of the harvest; since what this involves is principally the payment of wages, banknotes are used but little in England. This money then flows back to the Bank again, up to the end of the year. In Scotland, £1 notes are given almost invariably in place of sovereigns; here, therefore, it is the note circulation that expands in the corresponding case, in fact twice a year, in May and November, by some £3 to £4 million; fourteen days later the reflux has already set in, and within a month it is almost complete. (Anderson, op. cit. [C. D. 1848–57], nos. 3595–3600.)

The Bank of England’s note circulation also undergoes a temporary fluctuation each quarter as a result of the quarterly payment of ‘dividends’, i.e. interest on the national debt, banknotes firstly being withdrawn from circulation and then distributed amongst the public; but these flow back very quickly. Weguelin (B. A. 1857, no. 38) puts the total fluctuation to which this gives rise at £2 1/2 million. Mr Chapman, on the other hand, of the notorious firm of Overend, Gurney and Co., reckons the disturbance produced in the money market to be much higher. ‘When you abstract from the circulation £6,000,000 or £7,000,000 of revenue in anticipation of dividends, somebody must be the medium of supplying that in the intermediate times’ (B. A. 1857, no. 5196).

Far more important and persistent are the fluctuations in the total circulating medium that correspond to the various phases of the industrial cycle. Let us hear on this subject another partner in the same firm, the worthy Quaker Samuel Gurney (C. D. 1848–57, no. 2645): ‘At the end of October’ (1847) ‘the amount of banknotes in the hands of the public was £20,800,000. At that period there was great difficulty in getting possession of banknotes in the money-market. This arose from the alarm of not being able to get them in consequence of the restriction of the Act of 1844. At present’ (March 1848) ‘the amount of banknotes in the hands of the public is… £17,700,000, but there being now no commercial alarm whatsoever, it is much beyond what is required. There is no banking house or money-dealer in London, but what has a larger amount of banknotes than they can use.’ – ‘2650. The amount of banknotes… out of the custody of the Bank of England affords a totally insufficient exponent of the active state of the circulation, without taking into consideration likewise… the state of the commercial world and the state of credit.’ – ‘2651. The feeling of surplus that we have under the present amount of circulation in the hands of the public arises in a large degree from our present state of great stagnation. In a state of high prices and excitement of transaction £17,700,000 would give us a feeling of restriction.’

(As long as the state of business is such that the returns on advances made come in regularly, so that credit remains unimpaired, the expansion and contraction of circulation is governed simply by the needs of the industrialists and merchants. Since in England at least gold does not come into the picture for wholesale trade, and the gold circulation, apart from the seasonal fluctuations, can be seen as a magnitude that is fairly constant over a longish period of time, the Bank of England’s note circulation provides a sufficiently exact measurement of these changes. In the quiet period after the crisis, transactions are at their lowest; with the revival of demand there is also a greater requirement for means of circulation, which rises with increasing prosperity; the quantity of means of circulation reaches its high point in the period of over-exertion and over-speculation – then the crisis breaks out, and overnight the banknotes that were still so abundant the day before have vanished from the market, and with them the discounter of bills, the advancer on securities, the buyer of commodities. The Bank of England is supposed to help; but even its powers are soon exhausted, and the Bank Act of 1844 compels it to contract its note circulation at the very moment when the entire world is crying out for banknotes, when the owners of commodities cannot sell and yet are supposed to pay, and are ready to make any sacrifice, so long as they can obtain banknotes.

‘During an alarm,’ says banker Wright, whom we met above (op. cit., no. 2930), ‘the country requires twice as much circulation as in ordinary times, because the circulation is hoarded by bankers and others.’

In so far as a crisis breaks out, it is then simply a question of means of payment. But since each person is dependent on someone else for the arrival of these means of payment, and no one knows whether the other will be in a position to pay on the due date, a real steeplechase breaks out for those means of payment that are to be found in the market, i.e. for banknotes. Each person hoards as many as he can get his hands on, so that the notes vanish from circulation the very day they are most needed. Samuel Gurney (C. D. 1848–57, no. 1116) estimates a figure of £4–£5 million for the banknotes put under lock and key at the moment of panic in October 1847. – F. E.)

In this connection the evidence to the 1857 Bank Acts Committee of Gurney’s partner, the afore-mentioned Chapman, is highly interesting. I give here the principal content of this in its original context, although some points that it covers we shall investigate only later. Mr Chapman expresses the matter as follows:

‘4963.I have also no hesitation in saying that I do not think it is a proper condition of things that the money-market should be under the power of any individual capitalist (such as does exist in London), to create a tremendous scarcity and pressure, when we have a very low state of circulation out. That is possible… there is more than one capitalist, who can withdraw from the circulating medium £1,000,000 or £2,000,000 of notes, if they have an object to attain by it.’

4965. A big speculator can sell £1 or £2 millions worth of Consols, and thus take money out of the market. Something of this kind happened quite recently, ‘it creates a very violent pressure’.

4967. The notes, besides, are then quite unproductive. ‘But that is nothing, if it effects his great object; his great object is to knock down the funds, to create a scarcity, and he has it perfectly in his power to do so.’

To give one example. One morning there was a great demand for money from the stock exchange. No one knew the cause. Someone asked Chapman to lend him £50,000 at 7 per cent. Chapman was greatly surprised, as his rate of interest was much lower; he agreed. Very soon the man returned and took a further £50,000 at 7 1/2 per cent, then £100,000 at 8 per cent, and wanted still more at 8 1/2 per cent. Chapman then got worried himself. It subsequently emerged that a major sum of money had suddenly been withdrawn from the market. However, said Chapman, ‘I did lend a large sum at 8 per cent; I was afraid to go beyond; I did not know what was coming.’

It should never be forgotten that although a fairly constant sum of £19–£20 million in notes is ostensibly in the hands of the public, yet the portion of these notes that is actually circulating, on the one hand, and the portion that lies unoccupied in the banks as a reserve, on the other, are both constantly and substantially changing. If the reserve is large, i.e. the actual circulation low, it is said from the standpoint of the money market that the circulation is full, or money is plentiful; if the reserve is small, i.e. the actual circulation full, the money market call it low and say money is scarce, i.e. only a small amount represents unoccupied loan capital. A genuine expansion or contraction of circulation independent of the phases of the industrial cycle – one in which the amount that the public needs remains the same – is only to be found for technical reasons, e.g. at the payment date of taxes or of interest on the national debt. With tax payment, notes and gold flow into the Bank of England in more than their customary measure, and in fact circulation contracts, irrespective of the need for it. Conversely, when dividends are paid out on the national debt. In the first case, loans are taken out from the Bank in order to obtain means of circulation. In the latter case the rate of interest charged by the private banks falls on account of the temporary growth in their reserves. This has nothing to do with the absolute total of means of circulation, but simply with the banking house that puts these means of circulation into circulation, for which this process appears as an alienation of loan capital and which therefore pockets the profit on it.

In the one case there is simply a temporary displacement of the circulating medium, which the Bank of England adjusts by making short-term advances at low interest shortly before the due date of the quarterly taxes and the likewise quarterly dividends; the additional notes paid out in this way then first of all fill the gaps that the payment of taxes gives rise to, while their repayment to the Bank immediately afterwards brings back the surplus notes which the paying out of dividends has placed with the public.

In the other case, a low or full circulation is never more than a different distribution of the same mass of means of circulation between active circulation and deposits, i.e. as an instrument for loans.

On the other hand, if for example an influx of gold leads to an increase in the number of notes given out by the Bank of England in return, these help the business of discounting outside the Bank and flow back in the repayment of loans, so that the absolute volume of notes in circulation is only temporarily increased.

If the circulation is full, on account of an expansion of business (which is only possible given relatively low prices), the rate of interest may be relatively high on account of the demand for loan capital that results from rising profits and increased new investments. If it is low, on account of a contraction of business or possibly a greater ease of credit, the rate of interest may be low even if prices are high. (See Hubbard.)*

The absolute quantity of circulation has a determining effect on the rate of interest only in periods of pressure. In this case, either the demand for a full circulation is merely a demand for means of hoarding (apart from the reduced velocity with which the money circulates, and with which the same identical pieces of money are constantly converted into loan capital), on account of the lack of credit, as in 1847, when the suspension of the Bank Act did not lead to any expansion in the circulation but was sufficient to bring hoarded notes to light again and make them circulate actively. Or else more means of circulation may really be required under these circumstances, in the way that the circulation really did grow for some time in 1857 after the suspension of the Bank Act.

In other cases the absolute quantity of circulation has no effect on the rate of interest, since firstly, taking the economy and velocity of circulation as constant, it is determined by the price of commodities and the volume of transactions (in which case one element generally counteracts the effect of the other) and ultimately by the state of credit, whereas it in no way conversely determines the latter; and since, secondly, commodity prices and interest do not stand in any necessary relationship.

Under the Bank Restriction Act (1797–1820)†there was a surplus of ‘currency’, with the rate of interest always far higher than since the resumption of cash payment. It later fell sharply with the restriction of note issue and rising bill quotations. In 1822,1823 and 1832, the total circulation was low and the rate of interest similarly so. In 1824, 1825 and 1836 the circulation was high and the rate of interest rose. In summer 1830 the circulation was high, the rate of interest low. Since the gold discoveries, monetary circulation has expanded throughout Europe, and the interest rate has risen. The interest rate thus does not depend on the amount of money in circulation.

The distinction between the issue of means of circulation and the lending of capital is best shown in connection with the actual reproduction process. In Volume 2, Part Three, we saw how the various components of production are exchanged one for another. For example, variable capital consists materially of the means of subsistence of the workers, a portion of their own product. But it is paid out to them bit by bit in money. This the capitalist has to advance, and it depends very much on the organization of the credit system whether he can pay out the new variable capital again the next week with the old money that he paid out the week before. It is similar in the acts of exchange between the various components of a total social capital, e.g. between means of consumption and the means of production of these. The money for their circulation, as we have seen, must be advanced by one or both of the exchanging parties. It then remains in circulation, but returns time and again, after completing its exchange, to the person who advanced it, since it was advanced by him over and above the industrial capital he actually employed. (See Volume 2, Chapter 20.) 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.

Chapman: ‘5062. There may be times, when the notes in the hands of the public, though they may be large, are not to be had.’ There is money, even during a panic; but everyone takes good care not to transform it into loanable capital, loanable money; each holds on to it for actual needs of payment.

‘5099. The country bankers in rural districts send up their unemployed balances to yourselves and other houses? – Yes.’ – ‘5100. On the other hand, the Lancashire and Yorkshire districts require discounts from you for the use of their trades? – Yes.’ – ‘5101. Then by that means the surplus money of one part of the country is made available for the demands of another part of the country? – Precisely so.’

Chapman says that the banks’ custom of investing their surplus money capital for a short term in the purchase of Consols and treasury bills has greatly increased in recent times, since it became the custom to lend out this ‘money at call’ (i.e. money whose repayment may be demanded at any time, from one day to the next). He himself sees the purchase of this kind of paper as most unsuitable for his business. He therefore invests it in good bills of exchange, with one portion falling due each day, so that he always knows how much ready money he can count on. (5101 – 5105.)

The very growth of exports, for more or less every country, but particularly for the country that gives credit, presents itself as a growing demand on the domestic money market, which however is felt as such only in times of pressure. In periods when exports are increasing, long-term bills of exchange are generally drawn by manufacturers on the export merchant, against consignments of British manufacturers. (5126.)

‘5127. Is it not frequently the case that an understanding exists that those bills are to be redrawn from time to time? – (Chapman:) That is a thing which they keep from us; we should not admit any bill of that sort… I dare say it is done, but I cannot speak to a thing of the kind.’ (The innocent Chapman.) ‘5129. If there is a large increase of the exports of the country, as there was last year, of £20 million, will not that naturally lead to a great demand for capital for the discount of bills representing those exports? – No doubt.’ – ‘5130. Inasmuch as this country gives credit, as a general rule, to foreign countries for all exports, it would be an absorption of a corresponding increase of capital for the time being? – This country gives an immense credit; but then it takes credit for its raw material. We are drawn upon from America always at 60 days, and from other parts at 90 days. On the other hand we give credit; if we send goods to Germany, we give two or three months.’

Wilson asks Chapman (5131) whether bills are not already drawn on England against these imported raw materials and colonial goods at the same time as they are loaded, and whether the goods do not themselves already arrive simultaneously with the bills of lading. Chapman believes that this is the case, but knows nothing of this ‘commercial’ business; better informed people should be asked. In the export trade to America, Chapman says, ‘the goods are symbolized in transit’ [5133]; this gibberish is supposed to mean that the English export merchant draws a four-month bill against the commodities on one of the major American banking houses in London, and the banking house receives collateral from America.

‘5136. As a general rule, are not the more remote transactions conducted by the merchant, who waits for his capital until the goods are sold? – There may be houses of great private wealth, who can afford to lay out their own capital and not take any advance upon the goods; but the most part are converted into advances by the acceptances of some well-known established houses.’ – ‘5137. Those houses are resident in… London, or Liverpool, or elsewhere.’ – ‘5138. Therefore, it makes no difference, whether the manufacturer lays out his money, or whether he gets a merchant in London or Liverpool to advance it; it is still an advance in this country? – Precisely. The manufacturer in few cases has anything to do with it’ (but in 1847 in almost every case). ‘A man dealing in manufactured goods, for instance, at Manchester, will buy his goods and ship them through a house of respectability in London; when the London house is satisfied that they are all packed according to the understanding, he draws upon this London house for six months against these goods to India or China, or wherever they are going; then the banking world comes in and discounts that bill for him; so that, by the time he has to pay for those goods, he has the money all ready by the discount of that bill.’ – ‘5139. Although he has the money, the banker is laying out of his money? – The banker has the bill; the banker has bought the bill; he uses his banking capital in that form, namely, in discounting commercial bills.’

(Thus Chapman, too, sees the discounting of bills not as an advance, but rather as a purchase of commodities. – F. E.)

‘5140. Still that forms part of the demand upon the money-market in London? – No doubt; it is the substantial occupation of the money-market and of the Bank of England. The Bank of England are as glad to get these bills as we are, because they know them to be good property.’ – ‘5141. In that way, as the export trade increases, the demand upon the money-market increases also? – As the prosperity of the country increases, we’ (the Chapmans) ‘partake of it.’ – ‘5142. Then when these various fields for the employment of capital increase suddenly, of course, the natural consequence is that the rate of interest is higher? – No doubt about it.’

In 5143 Chapman cannot ‘quite understand, that under our large exports we have had such occasion for bullion’.

In 5144 the worthy Wilson asks: ‘May it not be that we give larger credits upon our exports than we take credits upon our imports? – I rather doubt that point myself. If a man accepts against his Manchester goods sent to India, you cannot accept for less than ten months. We have had to pay America for her cotton’ (that is perfectly true) ‘some time before India pays us; but still it is rather refined in its operation.’ – ‘5145. If we have had an increase, as we had last year, of £20 million in our exports of manufactures we must have had a very large increase of imports of raw material previously to that’ (and in this way over-exports are already identified with over-imports, and overproduction with over-trading), ‘in order to make up that increased quantity of goods? – No doubt.’ – ‘5146. We should have to pay a very considerable balance, that is to say, the balance, no doubt, would run against us during that time, but in the long run, with America… the exchanges are in our favour, and we have been receiving for some time past large supplies of bullion from America.’

In 5148 Wilson asks the arch-usurer Chapman whether he does not consider his high interest rate as a token of great prosperity and high profits. Chapman, evidently astonished by the naīveté of this sycophant, naturally confirms this, but is honest enough to make the following qualification: ‘There are some, who cannot help themselves; they have engagements to meet, and they must fulfil them, whether it is profitable or not; but, for a continuance’ (of the high rate of interest), ‘it would indicate prosperity.’

Both men forget that a high rate of interest can also indicate, as was the case in 1857, that the knights errant of credit are making the country unsafe. In this case, they can pay high rates of interest because they pay out of other people’s pockets (though in this way they help to determine the interest rate for everyone), meanwhile living in style on anticipated profits. At the same time, incidentally, precisely this can be a very profitable business for manufacturers, etc. The system of advances makes returns absolutely deceptive. This also explains the following, which needs no explanation as far as the Bank of England is concerned, since when interest rates are high it discounts at a lower rate than the others.

‘5156.I should say,’ says Chapman, ‘that our discounts, taking the present moment, when we have had for so long a high rate of interest, are at their maximum.’ (Chapman said this on 21 July 1857, a few months before the crash.) ‘5157. In 1852’ (when the interest rate was low) ‘they were not nearly so large.’ Because at that time business was still much healthier.

A particularly amusing aspect of Chapman’s evidence is how these people actually view the public’s money as their own property and believe they have a right to it, to ensure the permanent convertibility of the bills they discount. The questions and answers show great naīveté. It turns out to be the duty of legislation to ensure the permanent convertibility of the bills of exchange accepted by the major firms and to make sure that the Bank of England will rediscount them for the billbrokers under all circumstances. 1857, incidentally, saw the bankruptcy of three such billbrokers, to the tune of some £8 million, their own capital being infinitesimal in comparison with these debts.

‘5177. Do you mean by that that you think that they’ (that is bills accepted by Barings or Loyds) ‘ought to be discountable on compulsion, in the same way that a Bank of England note is now exchangeable against gold by compulsion? –I think it would be a very lamentable thing, that they should not be discountable; a most extraordinary position, that a man should stop payment, who had the acceptances of Smith, Payne & Co., or Jones, Loyd & Co. in his hands, because he could not get them discounted.’ – ‘5178. Is not the engagement of Messrs Baring an engagement to pay a certain sum of money when the bill is due? – That is perfectly true; but Messrs Baring, when they contract that engagement, and every other merchant who contracts an engagement, never dream that they are going to pay it in sovereigns; they expect that they are going to pay it at the Clearing House.’ – ‘5180. Do you think that there should be any machinery contrived by which the public would have a right to claim money before that bill was due by calling upon somebody to discount it? – No, not from the acceptor; but if you mean by that that we are not to have the possibility of getting commercial bills discounted, we must alter the whole constitution of things.’ – ‘5182. Then you think that it’ (commercial bill) ‘ought to be convertible into money, exactly in the same way that a Bank of England note ought to be convertible into gold? – Most decidedly so, under certain circumstances.’ – ‘5184. Then you think that the provisions of the currency should be so shaped that a bill of exchange of undoubted character ought at all times to be as readily exchangeable against money as a banknote? –I do.’ –.‘5185. You do not mean to say that either the Bank of England or any individual should, by law, be compelled to exchange it? – I mean to say this, that in framing a bill for the currency, we should make provision to prevent the possibility of an inconvertibility of the bills of exchange of the country arising, assuming them to be undoubtedly solid and legitimate.’

This is the convertibility of the commercial bill of exchange against the convertibility of the banknote.

‘5190. The money-dealers of the country only, in point of fact, represent the public’ – as Mr Chapman did later at the Assizes in the Davidson case. See the Great City Frauds.*

‘5196. During the quarters’ (when the dividends are paid) ‘it is… absolutely necessary that we should go to the Bank of England. When you abstract from the circulation £6,000,000 or £7,000,000 of revenue in anticipation of the dividends, somebody must be the medium of supplying that in the intermediate time.’ (In this case the question at issue is the supply of money, not of capital or loan capital.)

‘5169. Everybody acquainted with our commercial circle must know that when we are in such a state that we find it impossible to sell Exchequer bills, when India bonds are perfectly useless, when you cannot discount the first commercial bills, there must be great anxiety on the part of those whose business renders them liable to pay the circulating medium of the realm on demand, which is the case with all bankers. Then the effect of that is to make every man double his reserve. Just see what the result of that is throughout the country, that every country banker, of whom there are about 500, has to send up to his London correspondent to remit him £5,000 in banknotes. Taking such a limited sum as that as the average, which is quite absurd, you come to £2,500,000 taken out of the circulation. How is that to be supplied?’

Those private capitalists, etc. who have money, on the other hand, do not want to let go of it whatever the interest, for, as Chapman puts it, they say: ‘5195. We would rather have no interest at all, than have a doubt about our getting the money in case we require it.’

‘5173. Our system is this: That we have £300,000,000 of liabilities which may be called for at a single moment to be paid in the coin of the realm, and that coin of the realm, if the whole of it is substituted, amounts to £23,000,000, or whatever it may be; is not that a state which may throw us into convulsions at any moment?’ Hence the sudden collapse of the credit system into the monetary system in times of crisis.

Apart from the domestic panic during crises, we can speak of the quantity of money only in so far as metal world money is involved. And it is precisely this that Chapman excludes, speaking only of £23 million in banknotes.

The same Chapman: ‘5218. The primary cause of the derangement of the money-market’ (in April and later in October 1847) ‘no doubt was in the quantity of money which was required to regulate our exchanges, in consequence of the extraordinary importations of the year.’

Firstly, this reserve of world-market money was at that time reduced to its minimum. Secondly, it served at the same time as security for the convertibility of credit money, banknotes. It thus combined two completely different functions, although both of these arise from the nature of money, since real money is always world-market money, and credit money always depends on this world-market money.

In 1847, without the suspension of the 1844 Bank Act, ‘the clearing houses could not have been settled’ (5221).

Yet Chapman did have some inkling of the impending crisis: ‘5236. There are certain conditions of the money-market (and the present is not very far from it), where money is exceedingly difficult, and recourse must be had to the Bank.’

‘5239. With reference to the sums which we took from the Bank on the Friday, Saturday and Monday, the 19th, 20th, and 22nd of October, 1847, we should only have been too thankful to have got the bills back on the Wednesday following; the money reflowed to us directly the panic was over.’ On Tuesday, 23 October, the Bank Act was suspended, and the crisis thereby curbed.

Chapman believes (5274) that the bills of exchange running on London amount at any one time to some £100–£200 million. This does not include local bills on provincial centres.

‘5287. Whereas in October 1856, the amount of the notes in the hands of the public ran up to £21,155,000, there was an extraordinary difficulty in obtaining money; notwithstanding that the public held so much, we could not touch it.’ This was due to the anxiety produced by the straits in which the Eastern Bank had found itself for a while (March 1856).

5290. As soon as the panic is over, ‘all bankers deriving their profit from interest begin to employ the money immediately’.

5302. Chapman explains the disquiet at the decline in the bank reserve not from fear for the deposits, but rather because all those who might suddenly have to pay large sums of money knew very well that they could be driven to the Bank as the last resort in time of pressure on the money market; and ‘if the banks have a very small reserve, they are not glad to receive us; but on the contrary’.

It is very pleasant, incidentally, to observe how the reserve dwindles away as an actual magnitude. The banks keep a minimum for their current business, partly with themselves and partly with the Bank of England. The billbrokers hold the ‘loose bank money of the country’ without a reserve. And all the Bank of England has to set against its liabilities for deposits is simply the reserves of the bankers and others, besides ‘public deposits’, etc. It allows this reserve to fall to the lowest possible point, e.g. some £2 million. Apart from this £2 million in paper, therefore, the entire swindle has absolutely no other reserve than the metal reserve in times of pressure (and these periods reduce the reserve, because notes that come in against the metal that leaves the Bank must be destroyed). Hence any reduction of the metal reserve adds to the crisis with a drain of gold.

‘5306. If there should not be currency to settle the transactions at the clearing house, the only next alternative which I can see is to meet together, and to make our payments in first-class bills, bills upon the Treasury, and Messrs Smith, Payne, and so forth.’ – ‘5307. Then, if the government failed to supply you with a circulating medium, you would create one for yourselves? – What can we do? The public come in, and take the circulating medium out of our hands; it does not exist.’ – ‘5308. You would only then do in London what they do in Manchester every day of the week? – Yes.’

Chapman has a very good answer to the question put to him by Cayley (a Birmingham man of the Attwood school) *concerning Overstone’s conception of capital: ‘5315. It has been stated before this Committee, that in a pressure like that of 1847, men are not looking for money, but are looking for capital; what is your opinion in that respect? –I do not understand it; we only deal in money; I do not understand what you mean by it.’ – ‘5316. If you mean thereby’ (commercial capital) ‘the quantity of money which a man has of his own in his business, if you call that capital, it forms, in most cases, a very small proportion of the money which he wields in his affairs through the credit which is given him by the public’ – through the mediation of the Chapmans.

‘5339. Is it the want of property that makes us give up our specie payments? – Not at all… It is not that we want property, but it is that we are moving under a highly artificial system; and if we have an immense superincumbent demand upon our currency, circumstances may arise to prevent our obtaining that currency. Is the whole commercial industry of the country to be paralysed? Shall we shut up all the avenues of employment?’ – ‘5338. If the question should arise whether we should maintain specie payments, or whether we should maintain the industry of the country, I have no hesitation in saying which I should drop.’

As to the hoarding of banknotes ‘with a view to aggravate the pressure and to take advantage of the consequences’ (5358), he says that this can happen very easily. Three major banks would suffice. ‘5383. Must it not be within your knowledge, as a man conversant with the great transactions of this metropolis, that capitalists do avail themselves of these crises to make enormous profit out of the ruin of the people who fall victims to them? – There can be no doubt about it.’

And we may well believe Mr Chapman here, even though he finally broke his own neck, commercially speaking, in an attempt to make ‘enormous profit out of the ruin of the victims’. For if his partner Gurney says that any change in business is advantageous for someone who is well informed, Chapman says: ‘The one section of the community knows nothing of the other; one is the manufacturer, for instance, who exports to the Continent, or imports his raw commodity; he knows nothing of the man who deals in bullion’ (5046). And this is how it happened that one day Gurney and Chapman were themselves not ‘well informed’, and fell into a notorious bankruptcy.

We have already seen how the issue of notes does not mean in all cases an advance of capital. The evidence of Tooke before the House of Lords Committee of 1848 on Commercial Distress, which now follows, only goes to show that an advance of capital, even if brought about by the Bank through the issue of new notes, does not by itself mean an increase in the amount of notes in circulation.

‘3099. Do you think that the Bank of England for instance might enlarge its advances greatly, and yet lead to no additional issue of notes? – There are facts in abundance to prove it; one of the most striking instances was in 1835, when the Bank made use of the West India deposits and of the loan from the East India Company in extended advances to the public. At that time the amount of notes in the hands of the public was actually rather diminished. And something like the same discrepancy is observable in 1846 at the time of the payment of the railway deposits into the Bank; the securities’ (in discount and deposits) ‘were increased to about thirty million, while there was no perceptible effect upon the amount of notes in the hands of the public.’

But, in addition to banknotes, wholesale trade has a second and far more important means of circulation: bills of exchange. Mr Chapman has shown us how essential it is for the regular course of business that good bills are always taken in payment under all circumstances. ‘Gilt nicht mehr der Tausves Jontof, was soll gelten, Zeter, Zeter!’*How then are these two means of circulation related?

Gilbart says on this score: ‘… The reduction of the amount of the note circulation uniformly increases the amount of the bill circulation. These bills are of two classes – commercial bills and bankers’ bills… when money becomes scarce, the money-lenders say, “draw upon us and we will accept”. And when a country banker discounts a bill for his customer, instead of giving him the cash, he will give him his own draft at twenty-one days upon his London agent. These bills serve the purpose of a currency’ (J. W. Gilbart, An Inquiry into the Causes of the Pressure, etc., p. 31).

In somewhat modified form, this is confirmed by Newmarch, B. A. 1857, no. 1426:

‘There is no connection between the variations in the amount of bill circulation and the variations in the banknote circulation… the only pretty uniform result is… that whenever there is any pressure upon the money-market, as indicated by a rise in the rate of discount, then the volume of the bill circulation is very much increased, and vice versa.’

The bills drawn in a time such as this, however, are in no way the short-term bank bills that Gilbart mentions. On the contrary, they are to a large extent bills of accommodation, which do not represent any real transactions at all, or only such as are embarked upon simply so as to draw bills on them; we have already given sufficient examples of both kinds. The Economist (Wilson) therefore says on the security of such bills in comparison with banknotes:

‘Notes payable on demand can never be kept out in excess, because the excess would always return to the bank for payment, while bills at two months may be issued in great excess, there being no means of checking the issue till they have arrived at maturity, when they may have been replaced by others. For a people to admit the safety of the circulation of bills payable only on a distant day, and to object to the safety of a circulation of paper payable on demand, is, to us, perfectly unaccountable’ (The Economist, 1847, p. 575).

The amount of bills in circulation, therefore, just like the amount of banknotes, is determined solely by the needs of commerce; in the 1850s, the U.K. circulation in ordinary times, besides £39 million in banknotes, came to some £300 million in bills of exchange, of which £100–£120 million were on London alone. The scale on which these bills circulate has no influence on the volume of note circulation and is influenced by the latter solely in times of tight money, when the quantity of bills increases and their quality deteriorates. Finally, at the moment of crisis, the bill circulation completely collapses; no one has any use for promises to pay, each wanting only to accept cash payment; only the banknote still keeps its ability to circulate, at least up till now in England, since the Bank of England is backed by the entire wealth of the nation.

The biggest capital power in London is of course the Bank of England, but its position as a semi-state institution makes it impossible for it to assert its domination in so brutal a fashion. None the less, it too is sufficiently capable of looking after itself – particularly since the 1844 Bank Act.

The Bank of England has a capital of £14,553,000, and besides this disposes of a ‘balance’ of some £3 million, i.e. undistributed profits, as well as all monies that the government receives in taxes, etc., which have to be deposited with it until they are used. If we add to this the sum of other deposits (in ordinary times some £30 million) and the banknotes issued without reserve backing, then Newmarch seems quite moderate in his assessment when he says (B. A. 1857, no. 1889): ‘I satisfied myself that the amount of funds constantly employed in the’ (London) ‘money-market may be described as something like £120,000,000; and of that £120 000,000 a very considerable proportion, something like 15 or 20 per cent, is wielded by the Bank of England.’

In as much as the Bank issues notes that are not backed by the metal reserve in its vaults, it creates tokens of value that are not only means of circulation, but also form additional – even if fictitious – capital for it, to the nominal value of these fiduciary notes. And this extra capital yields it an extra profit. – In B. A. 1857, Wilson asks Newmarch: ‘1563. The circulation of a banker, so far as it is kept out upon the average, is an addition to the effective capital of that banker, is it not? – Certainly.’ – ‘1564. Then whatever profit he derives from that circulation is a profit derived from credit, and not from a capital which he actually possesses? – Certainly.’

The same holds true of course for note-issuing private banks. In his answers nos. 1866–1868, Newmarch considers two-thirds of all these issued notes (for the last third, these banks must have metal reserves) as ‘the creation of so much capital’, because this amount of metal money is saved. The banker’s profit on this may not be greater than the profit of other capitalists. The fact remains that he draws his profit from this national saving on metal money. But the fact that a national saving appears as a private profit is in no way shocking to the bourgeois economist, since profit in general is the appropriation of the nation’s labour. Is there anything more crazy than that between 1797 and 1817, for example, the Bank of England, whose notes only had credit thanks to the state, then got paid by the state, i.e. by the public, in the form of interest on government loans, for the power that the state gave it to transform these very notes from paper into money and lend them to the state?

The banks, moreover, have still other ways of creating capital. According to the same Newmarch, the provincial banks, as already mentioned above, are obliged to send their surplus funds (i.e. Bank of England notes) to London billbrokers, who send them in exchange discounted bills. It is these bills which the provincial banks use to serve their customers, since their general rule is not to re-issue bills of exchange received from local clients, so that their business operations do not become known in their own locality. These bills of exchange received from London can be issued not only to clients who have direct payments to make in London, in case these do not prefer to get the bank’s own draft on London; they also serve to settle payments in the provinces, for the banker’s endorsement secures them local credit. In Lancashire, for example, they have driven out of circulation all the notes of the local banks and a great part of the Bank of England’s notes (ibid., nos. 1568–1574).

We see here, therefore, how the banks create credit and capital, (1) by issuing their own banknotes; (2) by writing drafts on London running for up to twenty-one days, which will however be paid to them in cash immediately they are written; (3) by reissuing bills of exchange, whose creditworthiness is created first and foremost by the endorsement of the bank, at least for the district in question.

The power of the Bank of England is shown by its regulation of the market rate of interest. In times when business runs its normal course, it may happen that the Bank of England cannot check a moderate drain of gold from its metal reserve by raising its discount rate,12 since the demand for means of payment is satisfied by the private and joint-stock banks, and by billbrokers, who have acquired a great deal of capital power in the last thirty years. It then has to employ other means. But for critical moments, what banker Glyn (of Glyn, Mills, Currie & Co.) testified to the Committee on Commercial Distress (1848–57) still holds true: ‘1709. Under circumstances of great pressure upon the country the Bank of England commands the rate of interest.’ – ‘1710. In times of extraordinary pressure… whenever the discounts of the private bankers or brokers become comparatively limited, they fall upon the Bank of England, and then it is that the Bank of England has the power of commanding the market rate.’

As a public institution under state protection, however, and endowed with state privileges, it cannot exploit its power relentlessly, as a private firm can allow itself to do. And this is why Hubbard stated to the Bank Acts Committee of 1857: ‘2844. (Question:) Is not it the case that when the rate of discount is highest, the Bank is the cheapest place to go, and that, when it is the lowest, the billbrokers are the cheapest parties? – (Hubbard:) That will always be the case, because the Bank of England never goes quite so low as its competitors, and when the rate is highest, it is never quite as high.’

It is still a serious event in business life when the Bank puts the screw on, as the customary expression goes, i.e. puts up an interest rate that is already above the average. ‘As soon as the Bank puts on the screw, all purchases for foreign exportation immediately cease… the exporters wait until prices have reached the lowest point of depression, and then, and not till then, they make their purchases. But when this point has arrived, the exchanges have been rectified – gold ceases to be exported before the lowest point of depression has arrived. Purchases of goods for exportation may have the effect of bringing back some of the gold which has been sent abroad, but they come too late to prevent the drain’ (J. W. Gilbart, An Inquiry into the Causes of the Pressure on the Money-Market, London, 1840, p. 35). – ‘Another effect of regulating the currency by the foreign exchanges is that it leads in seasons of pressure to an enormous rate of interest’ (ibid., p. 40). – ‘The cost of rectifying the exchanges falls upon the productive industry of the country, while during the process the profits of the Bank of England are actually augmented in consequence of carrying on her business with a less amount of treasure’ (ibid., p. 52).

However, friend Samuel Gurney says, ‘The great fluctuations in the rate of interest are advantageous to bankers and dealers in money – all fluctuations in trade are advantageous to the knowing man.’

And even if the Gurneys skim off the cream by a ruthless exploitation of the commercial distress, while the Bank of England cannot do this with the same freedom, quite handsome profits fall its way too – not to speak of the private profits that come the way of the gentlemen directors as a result of their exceptional opportunity for knowing the overall state of business. According to data presented to the Lords Committee of 1817 on the resumption of cash payment, the Bank of England’s total profits for the period 1797 – 1817 were as follows:

this being for nineteen years on a capital of £11,642,400 (D. Hardcastle, Banks and Bankers, 2nd edn, London, 1843, p. 120). If we calculate the total profits of the Bank of Ireland, which also suspended cash payment in 1797, according to the same principle, we arrive at the following result:

Bonuses and increased dividends New stock divided among proprietors Increased value of capital		7,451,136 7,276,500 14,553,000
	Total	29,280,636

Dividends as by returns due 1821 Declared bonus Increased assets Increased value of capital		4,736,085 1,225,000 1,214,800 4,185,000
	Total	11,360,885