(In an earlier work, 13 we investigated Ricardo’s theory of the value of money in relation to commodity prices; we can confine ourselves here, therefore, to what is most essential. According to Ricardo, the value of (metal) money is determined by the labour-time objectified in it, but only as long as the quantity of money stands in the right proportion to the quantity and price of the commodities to be exchanged. If the quantity of money rises above this proportion, its value falls and commodity prices rise; if it falls below the right proportion, its value rises and commodity prices fall – as long as other factors remain the same. In the first case, the country which has this surplus of gold will export the gold that has fallen below its value and import commodities; in the second case gold will flow into the countries where it is priced above its value, while the under-valued commodities from there will flow to other markets, where they can obtain normal prices. Since on these assumptions ‘even gold in the form of coin or bullion can become a value-token representing a larger or smaller value than its own, it is obvious that any convertible banknotes that are in circulation must share the same fate. Although banknotes are convertible and their real value accordingly corresponds to their nominal value, “the aggregate currency consisting of metal and of convertible notes” may appreciate or depreciate if, for reasons described earlier, the total quantity either rises above or falls below the level which is determined by the exchange-value of the commodities in circulation and the metallic value of gold. This depreciation, not of notes in relation to gold, but of gold and notes taken together, i.e., of the aggregate means of circulation of a country, is one of Ricardo’s main discoveries, which Lord Overstone and Co. pressed into their service and turned into a fundamental principle of Sir Robert Peel’s bank legislation of 1844 and 1845’ (op. cit., pp. 173–4).
We do not need to repeat here the demonstration of the absurdity of this theory of Ricardo’s that is given in that text. All that concerns us now is the form and manner in which Ricardo’s doctrines were taken up and elaborated by the school of banking theorists who dictated Peel’s Bank Acts.
‘The commercial crises of the nineteenth century, and in particular the great crises of 1825 and 1836, did not lead to any further development of Ricardo’s currency theory, but rather to new practical applications of it. It was no longer a matter of single economic phenomena – such as the depreciation of precious metals in the sixteenth and seventeenth centuries confronting Hume, or the depreciation of paper currency during the eighteenth century and the beginning of the nineteenth confronting Ricardo – but of big storms on the world market, in which the antagonism of all elements in the bourgeois process of production explodes; the origin of these storms and the means of defence against them were sought within the sphere of currency, the most superficial and abstract sphere of this process. The theoretical assumption which actually serves the school of economic weather experts as their point of departure is the dogma that Ricardo had discovered the laws governing purely metallic currency. It was thus left to them to subsume the circulation of credit money or banknotes under these laws.
‘The most common and conspicuous phenomenon accompanying commercial crises is a sudden fall in the general level of commodity prices occurring after a prolonged general rise of prices. A general fall of commodity prices may be expressed as a rise in the value of money relative to all other commodities, and, on the other hand, a general rise of prices may be defined as a fall in the relative value of money. Either of these statements describes the phenomenon but does not explain it… The different terminology has just as little effect on the task itself as a translation of the terms from German into English would have. Ricardo’s monetary theory proved to be singularly apposite since it gave to a tautology the semblance of a causal relation. What is the cause of the general fall in commodity prices which occurs periodically? It is the periodically occurring rise in the relative value of money. What on the other hand is the cause of the recurrent general rise in commodity prices? It is the recurrent fall in the relative value of money. It would be just as correct to say that the recurrent rise and fall of prices is brought about by their recurrent rise and fall… Once the transformation of the tautology into a causal relationship is taken for granted, everything else follows easily. The rise in commodity prices is due to a fall in the value of money, the fall in the value of money, however, as we know from Ricardo, is due to excessive currency, that is to say, to the fact that the amount of money in circulation rises above the level determined by its own intrinsic value and the intrinsic value of commodities. Similarly in the opposite case, the general fall of commodity prices is due to the value of money rising above its intrinsic value as a result of an insufficient amount of currency. Prices therefore rise and fall periodically, because periodically there is too much or too little money in circulation. If it is proved, for instance, that the rise of prices coincided with a decreased amount of money in circulation, and the fall of prices with an increased amount, then it is nevertheless possible to assert that, in consequence of some reduction or increase – which can in no way be ascertained statistically – of commodities in circulation, the amount of money in circulation has relatively, though not absolutely, increased or decreased. We have seen that, according to Ricardo, even when a purely metallic currency is employed, these variations in the level of prices must take place, but, because they occur alternately, they neutralize one another. For example, an insufficient amount of currency brings about a fall in commodity prices, the fall of commodity prices stimulates an export of commodities to other countries, but this export leads to an influx of money into the country, the influx of money causes again a rise in commodity prices. When there is an excessive amount of currency the reverse occurs: commodities are imported and money exported. Since notwithstanding these general price movements, which arise from the very nature of Ricardo’s metallic currency, their severe and vehement form, the form of crisis, belongs to periods with developed credit systems, it is clear that the issue of banknotes is not exactly governed by the laws of metallic currency: The remedy applicable to metallic currency is the import and export of precious metals, which are immediately thrown into circulation as coin, their inflow or outflow thus causing commodity prices to fall or to rise. The banks must now artificially exert the same influence on commodity prices by imitating the laws of metallic currency. If gold is flowing in from abroad, it is a proof that there is an insufficient amount of currency, that the value of money is too high and commodity prices to low, and banknotes must therefore be thrown into circulation in accordance with the newly imported gold. On the other hand, banknotes must be taken out of circulation in accordance with an outflow of gold from the country. In other words the issue of banknotes must be regulated according to the import and export of the precious metals or according to the rate of exchange. Ricardo’s wrong assumption that gold is simply specie and that consequently the whole of the imported gold is used to augment the money in circulation thus causing prices to rise, and that the whole of the gold exported represents a decrease in the amount of specie and thus causes prices to fall – this theoretical assumption is now turned into a practical experiment by making the amount of specie in circulation correspond always to the quantity of gold in the country. Lord Overstone (Jones Loyd, the banker), Colonel Torrens, Norman, Clay, Arbuthnot and numerous other writers known in England as the “currency school” have not only preached this doctrine, but have made it the basis of the present English and Scottish banking legislation by means of Sir Robert Peel’s Bank Acts of 1844 and 1845. The analysis of the ignominious fiasco they suffered both in theory and practice, after experiments on the largest national scale, can only be made in the section dealing with the theory of credit’ (ibid., pp. 182–5).
This school met criticism from Thomas Tooke, James Wilson (in The Economist of 1844–7) and John Fullarton. We have already seen several times, particularly in Chapter 28 of this volume, how inadequately these critics penetrated the nature of gold and how unclear they were as to the relationship between money and capital. We quote here simply a few instances in connection with the proceedings of the House of Commons Committee of 1857 on the Peel Bank Acts (B. A. 1857) – F. E.)
J. G. Hubbard, former Governor of the Bank of England, testifies: ‘2400. The effect of the export of bullion… has no reference whatever to the prices of commodities. It has an effect, and a very important one, upon the price of interest-bearing securities, because, as the rate of interest varies, the value of commodities which embodied that interest is necessarily powerfully affected.’
He produces two tables for the years 1834–43 and 1845–56, which show how the price movements for fifteen of the most important items of commerce were quite independent of the inflow and outflow of gold, and of the rate of interest. They do show,however, a close connection between the inflow and outflow of gold, on the one hand, which is in fact the ‘representative of our uninvested capital’, and the rate of interest on the other.
‘In 1847, a very large amount of American securities were retransferred to America, and Russian securities to Russia, and other continental securities were transferred to those places from which we drew our supplies of grain.’
The fifteen items on which the following tables of Hubbard’s are based are: raw cotton, cotton yarn, cotton fabrics, wool, woollen cloth, flax, linen, indigo, pig-iron, tin, copper, tallow, sugar, coffee and silk.
1.1834–43
|
|
|
Of fifteen major articles |
||
Date |
Bullion reserve of Bank |
Market rate of discount |
Price increase |
Price decrease |
Unchanged |
1834, 1 March |
£9,104,000 |
2 3/4% |
— |
— |
— |
1835, 1 March |
6,274,000 |
3 3/4% |
7 |
7 |
1 |
1836, 1 March |
7,918,000 |
3 1/4% |
11 |
3 |
1 |
1837, 1 March |
4,077,000 |
5% |
5 |
9 |
1 |
1838, 1 March |
10,471,000 |
2 3/4% |
4 |
11 |
— |
1839, 1 Sept. |
2,684,000 |
6% |
8 |
5 |
2 |
1840, 1 June. |
4,571,000 |
4 3/4% |
5 |
9 |
1 |
1840, 1 Dec. |
3,642,000 |
5 3/4% |
7 |
6 |
2 |
1841, 1 Dec. |
4,873,000 |
5% |
3 |
12 |
— |
1842, 1 Dec. |
10,603,000 |
2 1/2% |
2 |
13 |
— |
1843, 1 June. |
11,566,000 |
2 1/4% |
1 |
14 |
— |
II. 1844–53
|
|
|
Of fifteen major articles |
||
Date |
Bullion reserve of Bank |
Market rate of discount |
Price increase |
Price decrease |
Unchanged |
1844, 1 March |
£16,162,000 |
2 1/4% |
— |
— |
— |
1845, 1 Dec. |
13,237,000 |
4 1/2% |
11 |
4 |
— |
1846, 1 Sept. |
16,366,000 |
3% |
7 |
8 |
— |
1847, 1 Sept. |
9,140,000 |
6% |
6 |
6 |
3 |
1850, 1 March |
17,126,000 |
2 1/2% |
5 |
9 |
1 |
1851, 1 June. |
13,705,000 |
3% |
2 |
11 |
2 |
1852, 1 Sept. |
21,853,000 |
1 3/4% |
9 |
5 |
1 |
1853, 1 Dec. |
15,093,000 |
5% |
14 |
— |
1 |
Hubbard makes the following comment on these: ‘As in the years 1834–43, so in the period 1844–53, the upward and downward movements in the bullion of the Bank have invariably been accompanied with a decrease or increase in the loanable value of money advanced on discount; and, as in the earlier period, so in this, the variations in the prices of commodities in this country exhibit an entire independence of the amount of circulation as shown in the fluctuations in bullion of the Bank of England’ (Bank Acts Report, 1857, II, pp. 290–91).
Since the demand and supply of commodities regulates their market price, it is evident here how false is Overstone’s identification of the demand for loanable money capital (or rather the gap between its demand and supply), as expressed in the discount rate, with the demand for real ‘capital’. The contention that commodity prices are governed by fluctuations in the total amount of ‘currency’ is now concealed beneath the phrase that the fluctuations in the discount rate express fluctuations in the demand for actual material capital, as distinct from money capital. We have already seen how both Norman and Overstone actually maintained this before the Committee in question and to what weak subterfuges they were forced to resort, particularly the latter until he was finally cornered (Chapter 26). This is in actual fact the old humbug that changes in the quantity of gold, since they increase or decrease the amount of means of circulation in a country, must necessarily raise or lower commodity prices there. If gold is exported, then according to this currency theory commodity prices in the country where the gold goes must rise, and with them also the value of the exports of the gold-exporting country on the market of the gold-importing one; the value of the latter’s exports on the former market, on the other hand, would fall, since their value would rise in their country of origin, where the gold finds its way. In actual fact, a decline in the amount of gold simply raises the rate of interest, while an increase lowers it; and if these fluctuations in the interest rate did not come into account in establishing the cost price, or determining demand and supply, commodity prices would be completely unaffected.
In the same report, N. Alexander, head of a big firm in the India trade, expresses himself as follows on the sharp drain of silver to India and China in the mid-1850s, partly as a result of the Chinese civil war, which put a stop to the supply of English fabrics to China, and partly as a result of the silkworm disease in Europe, which sharply reduced silk production in Italy and France.
‘4337. Is the drain for China or for India? – You send the silver to India, and you buy opium with a great deal of it, all which goes on to China to lay down funds for the purchase of the silk; and the state of the markets in India (in spite of the accumulation of silver there) makes it a more profitable investment for the merchant to lay down silver than to send piece-goods or English manufactures.’ – ‘4338. In order to obtain the silver, has there not been a great drain from France? – Yes, very large.’ – ‘4344. Instead of bringing in silk from France and Italy, we are sending it there in large quantities, both from Bengal and from China.’
Thus silver was sent to Asia, where it is the money metal, instead of commodities, not because the price of these commodities had risen in the country that produced them (England), but because it had fallen – owing to excessive imports – in the country which imported them; even though England had to obtain this silver from France, and to pay for it partly with gold. According to the currency theory, prices should have fallen in England and risen in India and China as a result of such imports.
A further example. In his evidence to the House of Lords Committee (C. D. 1848–57), Wylie, one of the leading Liverpool merchants, said: ‘1994. At the close of 1845 there was no trade that was more remunerating, and in which there were such large profits’ (than cotton spinning). ‘The stock of cotton was large and good, useful cotton could be bought at 4d. per pound, and from such cotton good secunda mule twist no. 40 was made at an expense not exceeding a like amount, say at a cost of 8d. per pound, in all to the spinner. This yarn was largely sold and contracted for in September and October 1845 at 10 1/2 and 11 1/2d. per pound, and in some instances the spinners realized a profit equal to the first cost of the cotton.’ – ‘1996. The trade continued to be remunerative until the beginning of 1846.’ – ‘2000. On 3 March 1844, the stock of cotton’ (627,042 bales) ‘was more than double what it is this day’ (on 7 March 1848, when it was 301,070 bales) and yet the price then was 1 1/4d. per pound dearer.’ (6 1/4d. as against 5d.) – At the same time yarn, good secunda mule twist no. 40, had fallen from 11 1/2–12d. to 9 1/2d. per lb. in October, and to 7 3/4d. at the end of December 1847; yarn was sold at the purchase price of the cotton from which it had been spun (ibid., nos. 2021 and 2022).
This exposes the self-interest in Overstone’s wisdom that money is ‘dear ‘because capital is ‘scarce’. On 3 March 1844 the Bank rate stood at 3 per cent; in October and November 1847 it went up to 8 and 9 per cent, and on 7 March 1848 was down to 4 per cent again. Owing to the complete stagnation in sales and the panic, with its correspondingly high rate of interest, cotton prices had been driven far below the level corresponding to the supply. The result of this was on the one hand a tremendous decline in imports in 1848 and on the other hand a decline in production in America; hence a new rise in cotton prices in 1849. According to Overstone, the reason why commodities were too dear was that there was too much money in the country.
‘2002. The late decline in the condition of the cotton manufactories is not to be ascribed to the want of the raw material, as the price seems to have been lower, though the stock of the raw material is very much diminished.’
But Overstone conveniently confuses the price or value of a commodity with the value of money, i.e. the rate of interest. In answer to question 2026, Wylie delivers his overall verdict on the currency theory, on the basis of which Cardwell and Sir Charles Wood,* in May 1847, ‘asserted the necessity of carrying out the Bank Act of 1844 in its full and entire integrity’. ‘These principles seemed to me to be of a. nature that would give an artificial high value to money and an artificial and ruinously low value to all commodities and produce.’ He goes on to say of the effects of this Bank Act on the general state of business: ‘As bills at four months, which is the regular course of drafts, from manufacturing towns on merchants and bankers for the purchase of goods going to the United States, could not be discounted except at great sacrifices, the execution of orders was checked to a great extent, until after the Government Letter of 25 October’ (suspension of the Bank Act), ‘when those four months’ bills became discountable’ (2097).
The suspension of the Bank Act brought salvation for the provinces, too. ‘2102. Last October [1847] there was scarcely an American buyer purchasing goods here who did not at once curtail his orders as much as he possibly could; and when our advices of the dearness of money reached America, all fresh orders ceased.’ – ‘2134. Corn and sugar were special. The corn market was affected by the prospects of the harvest, and sugar was affected by the immense stocks and imports.’ – ‘2163. Of our indebtedness to America… much was liquidated by forced sales of consigned goods, and I fear that much was cancelled by the failures here.’ – ‘2196. If I recollect rightly, 70 per cent was paid on our Stock Exchange in October 1847.’
(The crisis of 1837 with its long aftermath, added to which was a further regular crisis in 1842, and the self-interested blindness of the industrialists and merchants, who were resolved not to notice any overproduction – this was all nonsense and an impossibility, said the vulgar economists! – all this finally brought about the mental confusion that allowed the currency school to translate their dogma into practice on a national scale. And thus the Bank legislation of 1844–5 went through.
The 1844 Bank Act divides the Bank of England into an Issue Department and a Banking Department. The former receives securities – for the most part government stock – for £14 million, as well as the entire metal reserve, of which no more than one quarter may consist of silver, and issues a sum of notes corresponding to this total amount. In so far as these are not in the hands of the public, they remain in the Banking Department and form its ever ready reserve, together with the small amount of coin needed for everyday use (about £1 million). The Issue Department gives the public gold for notes and notes for gold; all other dealings with the public are the concern of the Banking Department. Those private banks in England and Wales that were entitled in 1844 to issue their own notes retain this right, but their note issue is fixed. If one of these banks ceases to issue its own notes, the Bank of England can increase its own fiduciary note issue by two-thirds of the quota thus made available; in this way its issue has been increased, by 1892, from £14 million to £16 1/2 million (£16,450,000 to be precise).
Thus, for every £5 that leaves the Bank’s reserve in gold, a £5 note comes back to the Issue Department and is destroyed; for every five sovereigns that come into the reserve, a new £5 note is put into circulation. This is how Overstone’s ideal paper circulation, governed precisely by the laws of metal circulation, is carried out in practice, and in this way, according to the currency people’s contention, crises are made impossible once and for all.
In reality, however, the separation of the Bank into two independent departments withdrew the directors’ power of free disposal of their entire available means at decisive moments, so that situations could come about in which the Banking Department was faced with bankruptcy while the Issue Department still had several millions in gold, and besides this its £14 million intact in securities. And this could happen all the more easily in so far as every crisis has a point marked by a sharp drain of gold abroad, which has principally to be covered by the Bank’s metal reserve. But for every £5 that flows abroad in this way, a £5 note is withdrawn from circulation at home, so that the amount of means of circulation is reduced at the very moment when most is required, and with the greatest urgency at that. The Bank Act of 1844 thus directly provokes the entire world of commerce into meeting the outbreak of a crisis by putting aside a reserve stock of banknotes, thereby accelerating and intensifying the crisis. And by this artificial intensification of the demand for monetary accommodation, i.e. for means of payment, at the same time as the supply of these is declining, a demand which takes effect at the decisive moment, it drives the interest rate in crisis times up to a previously unheard-of level. Thus instead of abolishing crises, it rather intensifies them to a point at which either the entire world of industry has to collapse, or else the Bank Act. On two occasions, 25 October 1847 and 12 November 1857, the crisis reached such a height; the government then freed the Bank from the restriction on its note issue, by suspending the Act of 1844, and this was sufficient on both occasions to curb the crisis. In 1847 the certainty that banknotes could now once more be had in exchange for first-class securities was sufficient to bring £4–£5 million in notes back to the light of day and into active circulation; in 1857 rather less than £1 million in notes were issued above the legal quota, but only for a very short time.
Also to be mentioned here is that some parts of the legislation of 1844 reflected the memory of the first twenty years of the century, the time when the Bank suspended cash payment and banknotes depreciated in value. The fear that banknotes might lose their credit is still very much apparent here; a very excessive fear, since as early as 1825 the issue of a rediscovered supply of old £1 notes, which had been taken out of circulation, curbed the crisis and thereby showed that even at that period the credit of these banknotes remained unimpaired, even at a time of most general and pronounced lack of confidence. And this is quite comprehensible, for in fact the entire nation and its credit stands behind these tokens. – F. E.)
Let us listen now to a few witnesses on the effect of the Bank Act. John Stuart Mill believed that the Bank Act of 1844 had kept down over-speculation. This wise man had the good fortune to give his evidence on 12 June 1857. Four months later, the crisis broke out. He literally congratulated the ‘bank directors and the commercial public generally’ on the fact that they ‘understand much better than they did the nature of a commercial crisis, and the extreme mischief which they do both to themselves and to the public by upholding over-speculation’ (B. A. 1857, no. 2031)
The wise Mill believed that if £1 notes were issued ‘as advances to manufacturers and others, who pay wages… the notes may get into the hands of others who expend them for consumption, and in that case the notes do constitute in themselves a demand for commodities and may for some time tend to promote a rise of prices’ [no. 2066].
Does Mr Mill thus assume that the manufacturers would pay higher wages if they paid them in paper instead of in gold? Or does he believe that if the manufacturer obtained his advance in £100 notes and exchanged these for gold, these wages would then form less demand than if paid in £1 notes? Does he not know that in certain mining districts, for example, wages actually are paid in notes from local banks, so that several workers receive a £5 note together? Does this increase their demand? Or are bankers easier with manufacturers in small notes, advancing more money than in larger denominations?
(This peculiar fear that Mill had of £1 notes would be inexplicable if his entire work on political economy did not exhibit an eclecticism which never flinches from any contradictions. On the one hand, he supports Tooke on many points against Overstone, while on the other hand he believes commodity prices are determined by the amount of money present. He is thus in no way convinced that for each £1 issued – all other things remaining the same – a sovereign finds its way into the Bank’s reserve; he fears that the quantity of means of circulation might be increased and thereby devalued, so that commodity prices would rise. It is this and nothing else that is hidden behind his above caution. – F. E.)
On the division of the Bank into two departments and the excessive precautions taken to safeguard the cashing of notes, Tooke makes the following statement to the C. D. 1848–57:
The greater fluctuations of the interest rate in 1847, as compared with 1837 and 1839, are due solely to the separation of the Bank into two departments (3010). – The safety of banknotes was affected neither in 1825 nor in 1837 and 1839 (3015). – The demand for gold in 1825 was aimed only at filling the vacuum created by the complete discredit of the £1 notes of the country banks; this vacuum could be filled only by gold, until such time as the Bank of England also issued £1 notes (3022). – In November and December 1825 not the slightest demand existed for gold for export purposes (3023).
‘In point of discredit at home as well as abroad. A failure in paying the dividends and the deposits would be of far greater consequence than the suspending of the payment of banknotes’ (3028).
‘3035. Would you not say that any circumstance, which had the effect of ultimately endangering the convertibility of the note, would be one likely to add serious difficulty in a moment of commercial pressure? – Not at all.’
‘In the course of 1847… an increased issue from the circulating department might have contributed to replenish the coffers of the Bank, as it did in 1825’ (3058).
Before the Committee on B. A. 1857, Newmarch states: ‘1357. The first mischievous effect… of that separation of departments’ (of the Bank) ‘and… a necessary consequence from the cutting in two of the reserve of bullion has been that the banking business of the Bank of England, that is to say, the whole of that part of the operation of the Bank of England which brings it more immediately into contact with the commerce of the country, has been carried on upon a moiety only of its former amounts of reserve. Out of that division of the reserve has arisen, therefore, this state of things, that whenever the reserve of the Banking Department has been diminished, even to a small extent, it has rendered necessary an action by the Bank upon its rate of discount. That diminished reserve, therefore, has produced a frequent succession of changes and jerks in the rate of discount.’ – ‘1358. The alterations since 1844’ (until June 1857) ‘have been some sixty in number, whereas the alterations prior to 1844 in the same space of time certainly did not amount to a dozen.’
Palmer’s evidence to the Lords Committee (C. D. 1848–57) is also of particular interest, since he had been a director of the Bank of England since 1811 and Governor for a period.
‘828. In December 1825, there was about £1,100,000 of bullion remaining in the Bank. At that period it must undoubtedly have failed in toto, if this Act had been in existence’ (meaning the Act of 1844). ‘The issue in December, I think, was 5 or 6 millions of notes in a week, which relieved the panic that existed at that period.’
‘825. The first period’ (since 1 July 1825) ‘when the present Act would have failed, if the Bank had attempted to carry out the transactions then undertaken, was on the 28th of February 1837; at that period there were £3,900,000 to £4,000,000 of bullion in the possession of the Bank, and then the Bank would have been left with £650,000 only in the reserve. Another period is in the year 1839, which continued from the 9th of July to the 5th of December.’ – ‘826. What was the amount of the reserve in that case? – The reserve was minus altogether £200,000 upon the 5th of September. On the 5th of November it rose to about a million or a million and a half.’ – ‘830. The Act of 1844 would have prevented the Bank giving assistance to the American trade in 1837.’ – ‘831. There were three of the principal American houses that failed… Almost every house connected with America was in a state of discredit, and unless the Bank had come forward at that period, I do not believe that there would have been more than one or two houses that could have sustained themselves.’ – ‘836. The pressure in 1837 is not to be compared with that of 1847. The pressure in the former year was chiefly confined to the American trade.’ –838. (Early in June 1837 the management of the Bank discussed the question of overcoming the pressure.) ‘Some gentlemen advocated the opinion… that the correct principle was to raise the rate of interest, by which the price of commodities would be lowered; in short, to make money dear and commodities cheap, by which the foreign payment would be accomplished.’ – ‘906. The establishment of an artificial limitation of the powers of the Bank under the Act of 1844, instead of the ancient and natural limitation of the Bank’s powers, namely, the actual amount of its specie, tends to create artificial difficulty, and therefore an operation upon the prices of merchandise that would have been unnecessary but for the provisions of the Act.’ – ‘968. You cannot, by the working of the Act of 1844, materially reduce the bullion, under ordinary circumstances, below nine million and a half. It would then cause a pressure upon prices and credit which would occasion such an advance in the exchange with foreign countries as to increase the import of bullion, and to that extent add to the amount in the Issue Department.’ – ‘996. Under the limitation that you’(the Bank) ‘are now subject to, you have not the command of silver to an extent that you require at a time when silver would be required for an action upon the foreign exchanges.’ – ‘999. What was the object of the regulation restricting the Bank as to the amount of silver to one-fifth? – I cannot answer that question.’
The intention was to make money dear; similarly, the currency theory apart, with the separation of the Bank’s two departments and the compulsion for the Scottish and Irish banks to keep gold in their reserve for any issue of notes above a certain amount. This led to a decentralization of the nation’s metal reserve, which made it less capable of correcting unfavourable exchange rates. All the following stipulations lead to raising the rate of interest: that the Bank of England may not issue more than £14 million in notes aside from those issued against its gold reserve; that the Banking Department is to be administered as an ordinary bank, forcing the interest rate down when there is excess money and driving it up when there is a shortage; the restriction of the silver reserve, the principal means of rectifying exchange rates with the Continent and with Asia; the regulations for the Scottish and Irish banks, which never need gold for export but must now keep it under the pretext of a convertibility of their notes which is in fact pure illusion. The fact is that the Act of 1845 produced the first run on the Scottish banks for gold, in 1857. The new banking legislation also makes no distinction between a drain of gold abroad and a domestic drain, even though the effects of these two things are self-evidently quite different. Hence the constant and violent fluctuations in the market rate of interest. As regards silver, Palmer says twice (992 and 994) that the Bank can buy silver in exchange for notes only if the exchange rate is in England’s favour, so that there is an excess of silver; for: ‘1003. The only object in holding a considerable amount of bullion in silver is to facilitate making the foreign payment so long as the exchanges are against the country.’ – ‘1004. Silver is… a commodity which, being money in every other part of the world, is therefore the most direct commodity… for the purpose’ (payments abroad). ‘The United States latterly have taken gold alone.’
In his opinion, the Bank did not need to raise the interest rate above its old level of 5 per cent in times of pressure, as long as gold was not drawn abroad by an unfavourable rate of exchange. Were it not for the Act of 1844, all first-class bills could still be discounted without difficulty at the old rate (1018 to 1020). But with the 1844 Bank Act and the situation in which the Bank found itself in October 1847, ‘there was no rate of interest which the Bank could have charged to houses of credit, which they would not have been willing to pay to carry on their payments.’
And this high rate of interest was precisely the aim of the Act. In 1029 he refers to a ‘great distinction which I wish to draw between the action of the rate of interest upon a foreign demand’ (for precious metal) ‘and an advance in the rate for the object of checking a demand upon the Bank during a period of internal discredit.’ – ‘1023. Previously to the Act of 1844… when the exchanges were in favour of the country, and positive panic and alarm existed through the country, there was no limit put upon the issue, by which alone that state of distress could be relieved.’
These are the words of a man who was a director of the Bank of England for thirty-nine years. Let us now listen to a private banker, Twells, a partner in Spooner, Attwood and Co. since 1801. He is the only one out of all these witnesses before the B. A. 1857 who provides us with any insight into the actual state of affairs in the country, and sees the crisis impending. In other respects, however, he is a kind of Birmingham ‘little shilling man’, like his partners, the Attwood brothers, who are the founders of this school. (See Contribution to the Critique of Political Economy, p. 82.) He states: ‘4488. How do you think that the Act of 1844 has operated? – If I were to answer you as a banker, I should say that it has operated exceedingly well, for it has afforded a rich harvest to bankers and ’(money-) ‘capitalists of all kinds. But it has operated very badly to the honest industrious tradesman who requires steadiness in the rate of discount, that he may be enabled to make his arrangements with confidence… It has made money-lending a most profitable pursuit.’ – ‘4489. It’ (the Bank Act) ‘enables the London joint-stock banks to return from 20 to 22 per cent to their proprietors? – The other day one of them was paying 18 per cent and I think another 20 per cent; they ought to support the Act of 1844 very strongly.’ – ‘4490. The little tradesmen and respectable merchants, who have not a large capital… it pinches them very much indeed… The only means that I have of knowing is that I observe such an amazing quantity of their acceptances unpaid. They are always small, perhaps ranging from £20 to £100, a great many of them are unpaid and go back unpaid to all parts of the country, which is always an indication of suffering amongst… little shopkeepers.’
In 4494 he explains that business is presently unprofitable. His following remarks are important, since he saw the latent presence of the crisis when none of the others suspected it.
‘4494. Things keep their prices in Mincing Lane, but we sell nothing, we cannot sell upon any terms; we keep the nominal price.’
4495. He relates a particular case.A Frenchman sends a broker in Mincing Lane commodities for £3,000 to sell at a given price. The broker cannot obtain this price, and the Frenchman cannot sell below the price. The commodities are still around, but the Frenchman needs money. The broker therefore advances him £1,000, the Frenchman drawing a three-month bill of exchange on the broker for £1,000, with the goods as security. Three months later the bill falls due, but the commodities are still unsaleable. The broker then has to pay the bill, and although he has security for £3,000, he cannot cash this and gets into difficulties. Thus one person drags another down with him.
‘4496. With regard to the large exports… where there is a depressed state of trade at home, it necessarily forces large exportation.’ – ‘4497. Do you think that the home consumption has been diminished? – Very much indeed… immensely… the shopkeepers are the best authorities.’ – ‘4498. Still the importations are very large, does not that indicate a large consumption? – It does, if you can sell; but many of the warehouses are full of these things; in this very instance which I have been relating, there is £3,000 worth imported, which cannot be sold.’
‘4514. When money is dear, would you say that capital would be cheap? – Yes.’
This fellow thus in no way shares Overstone’s opinion that high interest is the same thing as dear capital.
How business is now conducted: ‘4616. Others are going to a very great extent, carrying on a prodigious trade in exports and imports, to an extent far beyond what their capital justifies them in doing; there can be no doubt of all of that. These men may succeed; they may by some lucky venture get large fortunes, and put themselves right. That is very much the system in which a great deal of trade is now carried on. Persons will consent to lose 20,30, and 40 per cent upon a shipment; the next venture may bring it back to them. If they fail in one after another, then they are broken up; and that is just the case which we have often seen recently; mercantile houses have broken up, without one shilling of property being left.’
‘4791. The low rate of interest’ (during the previous ten years) ‘operates against bankers, it is true, but I should have very great difficulty in explaining to you, unless I could show you the books, how much higher the profits’ (his own) ‘are now than they used to be formerly. When interest is low, from excessive issues, we have large deposits; when interest is high, we get the advantage in that way.’ – ‘4794. When money is at a moderate rate, we have more demand for it; we lend more; it operates in that way’ (for us, the bankers). ‘When it gets higher, we get more than a fair proportion for it; we get more than we ought to do.’
We have seen how all the experts consider the credit of Bank of England notes as unshakeable. Nevertheless, the Bank Act ties up absolutely some £9 to £10 million in gold, for the convertibility of these notes. The sanctity and inviolability of the reserve is thereby carried much farther than among the hoarders of old. W. Brown (Liverpool) testifies (C. D. 1848–57, no. 2311): ‘This money’ (the metal reserve in the Issue Department) ‘might as well have been thrown into the sea from any use that it was of at that time, there being no power to employ any of it without violating the Act of Parliament.’
The building contractor E. Capps, whom we already met with earlier, and from whose evidence we took the description of the modern building system in London (Volume 2, Chapter 12), gives his opinion of the 1844 Bank Act in the following words: ‘5508. Then upon the whole… you think that the present system’ (of bank legislation) ‘is a somewhat adroit scheme for bringing the profits of industry periodically into the usurer’s bag? –1 think so. I know that it has operated so in the building trade.’
As already mentioned, the 1845 Bank Act forced the Scottish banks into a system that was closer to the English. They were now obliged to hold gold in reserve for any note issue beyond a limit fixed for each bank. The effect this had is shown by some of the witnesses before the B. A. 1857.
Kennedy, director of a Scottish bank: ‘3375. Was there anything that you can call a circulation of gold in Scotland previously to the passing of the Act of 1845? – None whatever.’ – ‘3376. Has there been any additional circulation of gold since? – None whatever; the people dislike gold.’ – 3450. The sum of about £900,000 in gold, which the Scottish banks are compelled to keep since 1845, can only be injurious in his opinion and ‘absorbs unprofitably so much of the capital of Scotland’.
Anderson, director of the Union Bank of Scotland: ‘3588. The only pressure upon the Bank of England by the banks in Scotland for gold was for foreign exchanges? – It was; and that is not to be relieved by holding gold in Edinburgh.’ – ‘3590. Having the same amount of securities in the Bank of England’ (or in the private banks of England), ‘we have the same power that we had before of making a drain upon the Bank of England.’
Finally, a further article from The Economist (Wilson): ‘The Scotch banks keep unemployed amounts of cash with their London agents; these keep them in the Bank of England. This gives to the Scotch banks, within the limits of these amounts, command over the metal reserve of the Bank, and here it is always in the place where it is needed, when foreign payments are to be made.’
This system was upset by the 1845 Act. In consequence of the Act of 1845 for Scotland ‘of late a large drain of the coin of the Bank has taken place, to supply a mere contingent demand in Scotland, which may never occur… Since that period there has been a large sum uniformly locked up in Scotland, and another considerable sum constantly travelling back and forward between London and Scotland. If a period arrives when a Scotch bank expects an increased demand for its notes, a box of gold is brought down from London; when this period is past, the same box, generally unopened, is sent back to London’ (The Economist, 23 October 1847).
(And what does the father of the Bank Act, banker Samuel Jones Loyd, alias Lord Overstone, have to say to all this?
He already repeated before the Lords Committee of 1848 on Commercial Distress that ‘pressure, and a high rate of interest, caused by the want of sufficient capital, cannot be relieved by an extra issue of banknotes’ (1514), even though the mere permission for an increased note issue in the government letter of 25 October 1847 had sufficed to blunt the edge of the crisis.
He still maintains that ‘the high rate of interest and the depression of the manufacturing interests was the necessary result of the diminution of the material capital applicable to manufacturing and trading purposes’ (1604).
And yet the depressed condition of manufacturing industry for months back meant that material commodity capital overflowed the warehouses and was actually unsaleable, while for that very reason material productive capital lay either completely or partially idle, so as not to produce still more unsaleable commodity capital.
And before the Bank Acts Committee of 1857 he says: ‘By strict and prompt adherence to the principles of the Act of 1844, everything has passed off with regularity and ease, the monetary system is safe and unshaken, the prosperity of the country is undisputed, the public confidence in the wisdom of the Act of 1844 is daily gaining strength, and if the Committee wish for further practical illustration of the soundness of the principles on which it rests, or of the beneficial results which it has ensured, the true and sufficient answer to the Committee is, look around you, look at the present state of the trade of this country,… look at the contentment of the people, look at the wealth and prosperity which pervades every class of the community, and then having done so, the Committee may be fairly called upon to decide whether they will interfere with the continuance of an Act under which those results have been developed’ (B. A. 1857, no. 4189).
The antistrophe to this dithyramb that Overstone sang to the Committee on 14 July came on 12 November the same year, in the form of the letter to the Bank directors in which the government suspended the miracle-working act of 1844, in order to save what could still be saved. – F. E.)