With respect to the stockpiling of notes in times of pressure, we should note that the hoarding of precious metals repeated here is the same as marked times of disturbance in the most primitive social conditions. The Act of 1844 is interesting in its effects in so far as it seeks to transform all the country’s precious metal into means of circulation; it seeks to compensate for a drain of gold by a contraction of the means of circulation and for an influx of gold by an expansion of the means of circulation. When put to the test, the opposite was proved. With a single exception, which we shall mention immediately, the quantity of Bank of England notes in circulation since 1844 has never reached the maximum that the Bank was authorized to issue. The crisis of 1857 showed on the other hand that in certain circumstances this maximum is not sufficient. Between 13 and 30 November 1857, a daily average of £488,830 above the maximum was in circulation (B. A. 1858, p. xi). The legal maximum at that time was £14,475,000 plus the metal reserve in the Bank’s vaults.
As far as the inflow and outflow of precious metal goes, the following points are to be noted.
(1) The ebb and flow of metal within a region that does not produce gold or silver should be distinguished from the flow of gold and silver from their sources of production to the various other countries, and the distribution of this additional metal among the latter.
Before the opening of the gold mines in Russia, California and Australia, the supply since the beginning of the century had only been sufficient for the replacement of worn-down coins, for the traditional use as a luxury material and for the export of silver to Asia.
Since that time, however, the export of silver to Asia has grown extraordinarily, with the Asian trade of America and Europe. The silver exported from Europe was largely replaced by the additional gold. Further, a portion of the gold newly imported was absorbed by the domestic money circulation. It was estimated that up to 1857 approximately £30 million worth of gold had been added to England’s domestic circulation.14 Moreover, the average level of metal reserves has increased since 1844 for all the central banks of Europe and North America. The growth of the domestic money circulation immediately meant that after a panic, in the subsequent period of stagnation, bank reserves grew much more quickly as a result of the greater quantity of gold coin thrust out of domestic circulation and immobilized. Finally, the consumption of precious metal for luxury articles has risen since the new gold discoveries, as a result of increasing wealth.
(2) Precious metal is constantly moving back and forth between the countries that do not produce gold and silver; the same country is both constantly importing and constantly exporting. It is only a preponderant movement in one direction or the other that determines an ultimate outflow or inflow, since these movements, which tend simply to oscillate and often do so in parallel, to a large extent neutralize one another. But for this very reason, the fact that the two movements are constant and their courses run parallel with each other on the whole, as far as their result is concerned, is overlooked. The matter is always conceived as if an excess import or export of precious metal were simply the effect and expression of the import and export relationship for commodities, whereas it also expresses a relationship between the import and export of precious metal that is independent of commodity trade.
(3) The preponderance of imports over exports, or vice versa, can be broadly measured by the increase or decrease in the metal reserves of the central banks. The preciseness of this measurement depends of course first and foremost on how much the banking system is centralized. For on this depends the extent to which the precious metal stockpiled in the so-called national bank represents the whole of the nation’s metal reserve. But even on the assumption that this is in fact the case, the measurement is still not exact, since in certain circumstances an additional import of precious metal may be absorbed by domestic circulation and the growing luxury use of gold and silver, and, moreover, since a withdrawal of gold coin for domestic circulation might take place without any additional import, so that the metal reserve could decline even without a simultaneous increase in exports.
(4) An export of metal takes the form of a ‘drain’ if the movement of decline persists for a long period, so that the decline presents itself as a general tendency and the national bank’s metal reserve is significantly depressed below its average level, until something like its average minimum is reached. This latter is fixed more or less arbitrarily, since it is determined differently in each particular case by legislation governing the backing for cash payment of notes, etc. As to the quantitative limits that such a drain of gold could attain in England, Newmarch states before the Bank Acts Committee of 1857, Evidence, no. 1494: ‘Judging from experience, it is very unlikely that the efflux of treasure arising from any oscillation in the foreign trade will proceed beyond £3,000,000 or £4,000,000.’ In 1847, the Bank of England’s gold reserve saw its lowest level on 23 October, a drop of £5,198,156 from 26 December 1846, and of £6,453,748 from the highest point in that year (29 August).
(5) The function of the metal reserve held by a so-called national bank, a function that is far from being the only thing governing the size of the metal reserve, since this can grow simply through the crippling of domestic and foreign business, is threefold: (i) a reserve fund for international payments, i.e. a reserve fund of world money; (ii) a reserve fund for the alternately expanding and contracting domestic metal circulation; (iii) (and this is connected with the banking function and has nothing to do with the function of money as simple money) a reserve fund for the payment of deposits and the convertibility of notes. It can therefore also be affected by conditions that bear on only one of these three functions. Thus as an international fund, it may be affected by the balance of payments, whatever the reasons determining this and whatever their relationship to the balance of trade. As a reserve fund for domestic metal circulation, it may be affected by the expansion or contraction of the latter. The third function, as a guarantee fund, while it does not determine the autonomous movement of the metal reserve, still has a double effect. If notes are issued to replace metal money in domestic circulation (and also therefore silver coin in countries where silver is the measure of value), the second function of the reserve fund disappears. And a part of the precious metal that has served for this purpose will now permanently find its way abroad. In this case, there is no withdrawal of metal coin from domestic circulation, nor, therefore, is there any temporary strengthening of the metal reserve by the immobilization of a portion of the coined metal in circulation. Moreover, if a minimum metal reserve must be maintained under all circumstances for the payment of deposits and the convertibility of notes, this affects the workings of a drain or influx of gold in a particular way; it affects the portion of the reserve which the bank is bound to maintain under all circumstances, or else the part which it might seek to get rid of at another time as useless. With a purely metallic circulation and a centralized banking system, the bank would similarly have to treat its metal reserve as a guarantee for the payment of its deposits, and a drain of metal could lead to the same panic as in Hamburg in 1857.
(6) With the possible exception of 1837, the real crisis has always broken out only after the exchange rates have moved, i.e. once the import of precious metal has the upper hand again over the export.
In 1825 the actual crash occurred after the drain of gold had ceased. In 1839 a drain of gold took place without leading to a crash. In 1847 the drain of gold ceased in April and the crash came in October. In 1857 the drain of gold abroad had ceased by the beginning of November and the crash came only later in the month.
This tendency was particularly clear in the crisis of 1847, when the drain of gold had already ceased in April, after causing a relatively mild preliminary crisis, while the commercial crisis proper broke out only in October.
The following statements were made before the Secret Committee of the House of Lords on Commercial Distress, 1848, the evidence only being printed in 1857 (cited as C. D. 1848–57).
Evidence of Tooke: ‘In April 1847, a stringency arose, which, strictly speaking, equalled a panic, but was of relatively short duration and not accompanied by any commercial failures of importance. In October the stringency was far more intensive than at any time during April, an almost unheard-of number of commercial failures taking place (2996). – In April the rates of exchange, particularly with America, compelled us to export a considerable amount of gold in payment for unusually large imports; only by an extreme effort did the Bank stop the drain and drive the rates higher (2997). – In October the rates of exchange favoured England (2998). – The change in the rates of exchange had begun in the third week of April (3000). – They fluctuated in July and August; since the beginning of August they always favoured England (3001). – The drain on gold in August arose from a demand for internal circulation’ [3003].
J. Morris, Governor of the Bank of England. Although the exchange rate after August 1847 was in England’s favour, and an influx of gold thus took place, the metal reserve in the Bank still declined. ‘£2,200,000 went out into the country in consequence of the internal demand’ (137). – This is explained on the one hand by an increased employment of labourers in railway construction, and on the other by the ‘circumstance of the bankers wishing to provide themselves with gold in times of distress’ (147).
Palmer, ex-Governor of the Bank of England and a director since 1811: ‘684. During the whole period from the middle of April 1847 to the day of withdrawing the restrictive clause in the Act of 1844 the foreign exchanges were in favour of this country.’
The drain of metal, which gave rise to a specifically monetary panic in April 1847, is thus here as always simply a precursor of the crisis, and had already turned before this broke out. In 1839, at a time of severe business depression, a very pronounced drain of metal took place – for corn, etc. – but without a crisis or monetary panic.
(7) As soon as the general crisis has burned itself out, and we again have a state of equilibrium, the gold and silver (leaving aside the influx of fresh precious metal from the producing countries) is again distributed in the proportions in which it previously existed as hoards in the various countries. With circumstances remaining otherwise the same, the relative size of the hoard in each country is determined by this country’s role in the world market. It flows out of a country that has a greater share than normal, and into another; these movements of ebb and flow simply bring about its original distribution among the various national reserves. This redistribution is nevertheless mediated by the effect of various different circumstances that will be mentioned in dealing with the exchange rates. As soon as the normal distribution is re-established – from this moment on – there is first of all a growth and then again a drain. (This last sentence is evidently applicable only to England, as the focal point of the world money market. – F. E.)
(8) A drain of metal is generally the symptom of a change in the state of foreign trade, and this change is in turn an advance warning that conditions are again approaching a crisis.15
(9) The balance of payments may be in favour of Asia and against Europe and America.16
*
Imports of precious metal take place principally at two moments.
(1) In the first phase of low interest rates which follows the crisis and is marked by a contraction of production; as well as the subsequent phase in which the interest rate rises but has not yet reached its average level. This is the phase in which returns are brisk and commercial credit high, so that the demand for loan capital does not grow in proportion to the expansion of production. In both of these phases, where loan capital is relatively abundant, the superfluous influx of capital in the form of gold and silver, i.e. a form in which it can function at first only as loan capital, has an important effect on the rate of interest and hence on the entire business climate.
(2) A drain, i.e. a continued heavy export, of precious metal appears as soon as returns are no longer easy, markets are overstocked and the apparent prosperity is maintained only by credit; i.e. when a very pronounced demand for loan capital already exists, so that the rate of interest has reached at least its average level. Under these circumstances, which are precisely reflected in the drain of precious metal, the effect of a continued withdrawal of capital, in a form in which it exists directly as loan capital, is significantly intensified. This must have a direct effect on the rate of interest. But instead of the rise in the interest rate restricting credit transactions, it expands them and leads to an excessive strain on all their resources. This period therefore precedes the crash.
Newmarch was asked (B. A. 1857): ‘1520. But then the volume of bills in circulation increases with the rate of discount? – It seems to do so.’ – ‘1522. In quiet ordinary times the ledger is the real instrument of exchange; but when any difficulty arises; when, for example, under such circumstances as I have suggested, there is a rise in the bank-rate of discount… then the transactions naturally resolve themselves into drawing bills of exchange, those bills of exchange being not only more convenient as regards legal proof of the transaction which has taken place, but also being more convenient in order to effect purchases elsewhere, and being preeminently convenient as a means of credit by which capital can be raised.’
Added to this is the fact that as soon as somewhat threatening circumstances lead the Bank to raise its discount rate – which at the same time makes it probable that the Bank will restrict the term of the bills of exchange it is prepared to discount – a general fear sets in that this will mount to a crescendo. Everyone, therefore, and the credit-jobber above all, seeks to discount the future and have as many means of credit as possible at his disposal at the given moment. The reasons just adduced mean that it is not the mere quantity of precious metal imported or exported that operates as such, but that this firstly has its effect by way of the specific character of precious metal as capital in the money form, while secondly it acts as the feather which, added to the weight already on the scales, is enough to tip the balance decisively to one side; it has this effect because it intervenes in circumstances where anything extra on one side or the other is sufficient to tip the scales. Were it not for these reasons, it would be completely impossible to understand how a drain of gold of £5–£8 million, say, and this is the limit of our experience up till now, could exert any significant effect. This small increase or decrease in capital, which appears insignificant even against the £70 million in gold that is the average circulation in England, is infinitesimal against the total volume of English production.17 But it is precisely the development of the credit and banking system which on the one hand seeks to press all money capital into the service of production (or what comes to the same thing, to transform all money income into capital), while on the other hand it reduces the metal reserve in a given phase of the cycle to a minimum, at which it can no longer perform the functions ascribed to it – it is this elaborate credit and banking system that makes the entire organism oversensitive. At a less developed level of production, a contraction or expansion of the reserve in comparison with its average magnitude is a matter of relative indifference. Similarly, on the other hand, even a very severe drain of gold is relatively without effect, unless it takes place during the critical period of the industrial cycle.
The explanation we have given has ignored those cases in which the drain of metal arises as a result of harvest failures, etc. Here, a major and sudden disturbance in the balance of production, as expressed in the drain of gold, obviates the need for any further explanation. The effect is all the greater, the more this disturbance arises at a period when production is working at high pressure.
We have also ignored the function of the metal reserve as the guarantee for the convertibility of banknotes and as the pivot of the entire credit system. The central bank is the pivot of the credit system. And the metal reserve is in turn the pivot of the bank.18 It is inevitable that the credit system should collapse into the monetary system, as I have already shown in Volume 1, Chapter 3, in connection with means of payment. Both Tooke and Loyd-Overstone concede that the utmost sacrifice of real wealth is necessary at the critical moment in order to maintain the metal basis. The dispute simply turns on a plus or minus and on the more or less rational way to cope with something unavoidable.19
A certain quantity of metal that is insignificant in comparison with production as a whole is the acknowledged pivot of the system. Hence, on top of the terrifying illustration of this pivotal character in crises, the beautiful theoretical dualism. As long as it claims to treat ‘of capital’, enlightened economics looks down on gold and silver with the utmost disdain, as the most indifferent and useless form of capital. As soon as it deals with banking, however, this is completely reversed, and gold and silver become capital par excellence, for whose preservation every other form of capital and labour have to be sacrificed. But in what way are gold and silver distinguished from other forms of wealth? Not by magnitude, for this is determined by the amount of labour embodied in them. But rather as autonomous embodiments and expressions of the social character of wealth. (The wealth of society consists simply of the wealth of those individuals who are its private proprietors. It only proves itself to be social by the fact that these individuals exchange qualitatively different use-values with one another in order to satisfy their needs. In capitalist production, they can do this only by way of money. Thus it is only by way of money that the individual’s wealth is realized as social wealth; the social nature of that wealth is embodied in money, in this thing. – F. E.) This social existence that it has thus appears as something beyond, as a thing, object or commodity outside and alongside the real elements of social wealth. Credit, being similarly a social form of wealth, displaces money and usurps its position. It is confidence in the social character of production that makes the money form of products appear as something merely evanescent and ideal, as a mere notion. But as soon as credit is shaken, and this is a regular and necessary phase in the cycle of modern industry, all real wealth is supposed to be actually and suddenly transformed into money, into gold and silver – a crazy demand, but one that necessarily grows out of the system itself. And the gold and silver that is supposed to satisfy these immense claims amounts in all to a few millions in the vaults of the bank.20 A drain of gold, therefore, shows strikingly by its effects that production is not really subjected to social control, as social production, and that the social form of wealth exists alongside wealth itself as a thing. The capitalist system does have this in common with earlier systems of production in so far as these are based on commodity trade and private exchange. But it is only with this system that the most striking and grotesque form of this absurd contradiction and paradox arises, because (1) in the capitalist system production for direct use-value, for the producer’s own use, is most completely abolished, so that wealth exists only as a social process expressed as the entwinement of production and circulation; and (2) because with the development of the credit system, capitalist production constantly strives to overcome this metallic barrier, which is both a material and an imaginary barrier to wealth and its movement, while time and again breaking its head on it.
In the crisis we get the demand that all bills of exchange, securities and commodities should be simultaneously convertible into bank money all at once, and this bank money again into gold.
(The barometer for the international movement of the money metals is of course the rate of exchange. If England has to make more payments to Germany than Germany to England, in London the price of the mark as expressed in sterling rises, while in Hamburg and Berlin the price of sterling expressed in marks falls. If this surplus of English payment obligations towards Germany does not balance out again, for instance through a predominance of German purchases from England, the sterling price for bills of exchange in marks on Germany must rise to a point at which it pays to send metal from England to Germany in payment – gold coin or bullion – instead of bills of exchange. This is the typical course of events.
If this export of precious metal becomes more large-scale and persists for a longer time, the English bank reserves are affected, and the English money market – in the first place, the Bank of England – must take protective measures. Essentially these consist, as we have already seen, in putting up the rate of interest. With a major drain of gold, the money market usually becomes tight, i.e. the demand for loan capital in the money form significantly outweighs the supply, and a higher rate of interest then arises quite spontaneously; the discount rate decreed by the Bank of England corresponds to the actual situation and prevails in the market. But there are also cases where the drain of metal arises from out of the ordinary business transactions (e.g. from loans to foreign countries, capital investment abroad, etc.), so that the state of the London money market as such in no way justifies an effective raising of interest rates; the Bank of England then first has to ‘make money scarce’ by large-scale borrowing ‘on the open market’, as the expression goes, thus artificially producing the situation that justifies raising interest rates, or makes this necessary; a manoeuvre that becomes harder every year. – F. E.)
How this raising of the interest rate affects the rates of exchange is shown by the following evidence before the 1857 House of Commons Committee on Bank Legislation (cited as B. A. 1857).
John Stuart Mill: ‘2176. When there is a state of commercial difficulty there is always… a considerable fall in the price of securities… foreigners send over to buy railway shares in this country, or English holders of foreign railway shares sell their foreign railway shares abroad… there is so much transfer of bullion prevented.’ – ‘2182. A large and rich class of bankers and dealers in securities, through whom the equalization of the rate of interest and the equalization of commercial pressure between different countries usually takes place… are always on the look out to buy securities which are likely to rise… The place for them to buy securities will be the country which is sending bullion away.’ – ‘2184. These investments of capital took place to a very considerable extent in 1847, to a sufficient extent to have relieved the drain considerably.’
J. G. Hubbard, ex-Governor of the Bank of England, and a director since 1838: ‘2545. There are great quantities of European securities… which have a European currency in all the different money-markets, and those bonds, as soon as their value is… reduced by 1 or 2 per cent in one market, are immediately purchased for transmission to those markets where their value is still unimpaired.’ – ‘2565. Are not foreign countries considerably in debt to the merchants of this country? – Very largely.’ – ‘2566. Therefore, the cashment of those debts might be sufficient to account for a very large accumulation of capital in this country? – In 1847, the ultimate restoration of our position was effected by our striking off so many millions previously due by America, and so many millions due by Russia to this country.’
(England was in debt to those very countries for corn, to the tune of ‘so many millions’, and also did not fail to ‘strike off’ the greater part by the bankruptcy of English debtors. See the 1857 Report on the Bank Acts, as quoted in Chapter 30 above, p. 624 – F.E.)
‘2572. In 1847, the exchange between this country and St Petersburg was very high. When the Government Letter came out authorizing the Bank to issue irrespectively of the limitation of £14,000,000’ (above and beyond the gold reserve – F. E.), ‘the stipulation was that the rate of discount should be 8 per cent. At that moment, with the then rate of discount, it was a profitable operation to order gold to be shipped from St Petersburg to London and on its arrival to lend it at 8 per cent up to the maturity of the three months’ bills drawn against the purchase of gold.’ – ‘2573. In all bullion operations there are many points to be taken into consideration; there is the rate of exchange and the rate of interest, which is available for the investment during the period of the maturity of the bill’ (drawn against it – F. E.).
The following points are important, firstly, because they show how England, when its rate of exchange with Asia is unfavourable, manages to recoup its losses from other countries whose imports from Asia are paid for through English middlemen. Secondly, however, because here again Mr Wilson makes the stupid attempt to identify the impact of an export of precious metal on the rate of exchange with the impact of an export of capital in general on the rate; the export in question being in both cases not a means of purchase or payment but an export for capital investment. It is self-evident, to start with, that if so and so many million pounds are sent to India, to be invested there in railways, then whether they are sent in precious metal or in iron rails is simply a difference in form, the same amount of capital being transferred in each case from one country to the other; this transfer, moreover, does not go into the ordinary commercial account, and the exporting country does not expect any other return for it than the subsequent annual revenue from the earnings of these railways. If this export takes place in the form of precious metal, then, because precious metal as such is directly loanable money capital and the basis of the entire money system, it will not necessarily always have a direct effect on the money market and thereby on the rate of interest in the country exporting this precious metal, though it does have this effect in the cases so far developed. It has a similarly direct effect on the rate of exchange. In particular, precious metal is sent in payment only in so far as the bills of exchange that are offered on the London money market, on India for example, are insufficient to make these extra remittances. The demand for bills of exchange on India thus outweighs the supply, and so the rate of exchange turns temporarily against England; not because England is in debt to India but rather because it has to send extraordinary sums to India. In the long run, such an export of precious metal to India must have the effect of increasing the Indian demand for English commodities, because it indirectly raises India’s power to consume European goods. If however the capital is dispatched in the form of rails, etc., it cannot have any influence on the rate of exchange, since India does not have to make any return payment for these. For this very reason, it also need not have any effect on the money market. Wilson seeks to elicit an effect of this kind from the fact that extra outlays such as these lead to an extra demand for monetary accommodation, and thus affect the rate of interest. This may well be the case; but to contend that it has to take place under any circumstances is totally mistaken. Wherever the rails may be sent and laid, whether on English soil or on Indian, they represent nothing but a certain expansion of English production in a particular sphere. To maintain that an increase in production, even a very substantial one, cannot take place without driving up the rate of interest is sheer foolishness. Monetary accommodation may grow, i.e. the sum of dealings in which credit operations are involved; but these operations can increase while the given rate of interest remains the same. This was in fact the case in England during the railway mania of the 1840s. The interest rate did not rise. And it is obvious that in so far as real capital comes into consideration, in this case commodities, the effect on the money market is exactly the same whether these commodities are designed for export abroad or for domestic use. There could only be a distinction if England’s capital investment abroad had a limiting effect on its commercial exports – on exports that have to be paid for and thus bring a return – or in so far as these capital investments in general were already a symptom of an over-taxing of credit and the beginning of fraudulent operations.
In the following extract, Wilson is the questioner and Newmarch replies.
‘1786. On a former day you stated, with reference to the demand for silver for the East, that you believed that the exchanges with India were in favour of this country, notwithstanding the large amount of bullion that is continually transmitted to the East; have you any ground for supposing the exchanges to be in favour of this country? – Yes, I have… I find that the real value of the exports from the United Kingdom to India in 1851 was £7,420,000; to that is to be added the amount of India House drafts, that is, the funds drawn from India by the East India Company for the purpose of their own expenditure. Those drafts in that year amounted to £3,200,000, making, therefore, the total export from the United Kingdom to India £10,620,000. In 1855… the actual value of the export of goods from the United Kingdom had risen to £10,350,000 and the India House drafts were £3,700,000, making, therefore, the total export from this country £14,050,000. Now as regards 1851, I believe there are no means of stating what was the real value of the import of goods from India to this country, but in 1854 and 1855 we have a statement of the real value; in 1855, the total real value of the imports of goods from India to this country was £12,670,000 and that sum, compared with the £14,050,0001 have mentioned, left a balance in favour of the United Kingdom, as regards the direct trade between the two countries, of £1,380,000.’
Wilson comments on this that the exchange rates are also affected by indirect trade. Thus exports from India to Australia and North America are covered by drafts on London and have exactly the same effect on the exchange rate as if the commodities went directly from India to England. If India and China are taken together, moreover, the balance would be against England, since China always has sizeable payments to make to India for opium, and England has payments to make to China, the sums involved going on to India by this detour. (1787,1788.)
In 1791 Wilson then asks whether the effect on the exchange rates would not be the same irrespective of whether the capital ‘went in the form of iron rails and locomotives, or whether it went in the form of coin’. Newmarch’s response to this is quite correct: the £12 million that was sent to India in recent years for railway construction has served to purchase an annuity which India has to pay to England at regular intervals. ‘But as far as regards the immediate operation on the bullion market, the investments of the £12 million would only be operative as far as bullion was required to be sent out for actual money disbursements.’
1797. (Weguelin asks:) ‘If no return is made for this iron’ (rails), ‘how can it be said to affect the exchanges? –I do not think that that part of the expenditure which is sent out in the form of commodities affects the computation of the exchange… The computation of the exchange between two countries is affected, one might say, solely by the quantity of obligations or bills offering in one country, as compared with the quantity offering in the other country against it; that is the rationale of the exchange. Now, as regards the transmission of those £12,000,000, the money in the first place is subscribed in this country… now, if the nature of the transaction was such that the whole of that £12,000,000 was required to be laid down in Calcutta, Bombay, and Madras in treasure… a sudden demand would very violently operate upon the price of silver, and upon the exchange, just the same as if the India Company were to give notice tomorrow that their drafts were to be raised from £3,000,000 to £12,000,000. But half of those £12,000,000 is spent… in buying commodities in this country… iron rails and timber, and other materials… it is an expenditure in this country of the capital of this country for a particular kind of commodity to be sent out to India, and there is an end of it.’ – 1798. (Weguelin:) ‘But the production of those articles of iron and timber necessary for the railways produces a large consumption of foreign articles, which might affect the exchange? – Certainly.’
Wilson then offers the opinion that iron largely represents labour, while the wages paid for this labour largely represent imported goods (1799). He goes on to ask:
‘1801. But speaking quite generally, it would have the effect of turning the exchanges against this country if you sent abroad the articles which were produced by the consumption of the imported articles without receiving any remittance for them either in the shape of produce or otherwise? – That principle is exactly what took place in this country during the time of the great railway expenditure’ (1845). ‘For three or four or five years, you spent upon railways £30,000,000, nearly the whole of which went in the payment of wages. You sustained in three years a larger population employed in constructing railways, and locomotives, and carriages, and stations than you employed in the whole of the factory districts. The people… spent those wages in buying tea and sugar and spirits and other foreign commodities; those commodities were imported; but it was a fact, that during the time this great expenditure was going on the foreign exchanges between this country and other countries were not materially deranged. There was no efflux of bullion, on the contrary, there was rather an influx.’
1802. Wilson insists that, given a settled balance of trade between England and India and the exchange rate at par values. the extra shipment of iron and locomotives ‘would affect the exchanges with India’. Newmarch cannot accept this, if the rails are sent as capital investment and India does not have to pay for them in one form or another. He also adds: ‘I agree with the principle that no one country can have permanently against itself an adverse state of exchange with all the other countries, with which it deals; an adverse exchange with one country necessarily produces a favourable exchange with another.’
Wilson then throws him the following triviality: ‘1803. But would not a transfer of capital be the same whether it was sent in one form or another? – As regards the obligation it would.’ – ‘1804. The effect therefore of making railways in India, whether you send bullion or whether you send materials, would be the same upon the capital-market here in increasing the value of capital as if the whole was sent out in bullion?’
If iron prices did not rise, this was at least a proof that the ‘value’ of the ‘capital’ contained in the rails had not increased. But what is at issue is the value of the money capital, the rate of interest. Wilson is trying to identify money capital and capital in general. The simple fact is, firstly, that £12 million was subscribed in England for Indian railways. This is something that has nothing directly to do with the rate of exchange, and the designation of the £12 million is similarly immaterial as far as the money market is concerned. If the money market is in a favourable condition, it need not have any effect at all, just as the English railway subscriptions of 1844 and 1845 left the money market unaffected. If the money market is already somewhat tight, the rate of interest could be affected, but only in the sense of a rise, and according to Wilson’s theory this would necessarily have an effect on the exchange rates that was favourable for England, i.e. it would inhibit the tendency to export precious metal; if not to India, then at least elsewhere. Mr Wilson jumps from one thing to another. In question 1802 it is the exchange rate that is supposedly affected, in question 1804 the ‘value of capital’ – two very different things. The rate of interest may have an effect on the exchange rates, and the exchange rates may have an effect on the rate of interest. But the rate of interest may also remain constant despite a change in exchange rates, while exchange rates may remain constant despite a change in the rate of interest. Wilson cannot accept that when capital is sent abroad, the mere form in which it is sent can have such a different effect; i.e. that the difference in the form of the capital has this importance, and its money form at that. This is something that contradicts the whole trend of enlightened economics. Newmarch answers Wilson one-sidedly; he gives him not the slightest warning that he has suddenly leapt without reason from the exchange rate to the rate of interest. Newmarch’s response to this question 1804 is uncertain and vacillating:
‘No doubt, if there is a demand for £12,000,000 to be raised, it is immaterial, as regards the general rate of interest, whether that £12 million is required to be sent in bullion or in materials. I think, however’ (a fine transition, this ‘however’, when he intends to say the exact opposite) ‘it is not quite immaterial’ (it is immaterial, but, nevertheless, it is not immaterial) ‘because in the one case the £6 million would be returned immediately; in the other case it would not be returned so rapidly. Therefore it would make some’ (what definiteness!) ‘difference, whether the £6 million was expended in this country or sent wholly out of it.’
Is this supposed to mean that the £6 million would return immediately? In so far as this £6 million has been spent in England, it exists in rails, locomotives, etc. that are sent to India, from where they do not return, and it is only by amortization, i.e. very slowly, that their value returns, whereas the £6 million in precious metal might well return very quickly in kind. In so far as the £6 million was spent on wages, it has been consumed; but the money in which it was advanced continues to circulate in the country just as before, or else forms a reserve. The same applies to the profits of the rail producers and to the portion of the £6 million that replaces their constant capital. The ambiguous word ‘return’ is thus used by Newmarch simply to avoid saying directly that the money remains in the country, and that in so far as it functions as loanable money capital, the difference for the money market (aside from the fact that more metal money might have been absorbed for circulation) is simply that it is spent on A’s account rather than B’s. Investment of this kind, where the capital is transferred to other countries in commodities rather than in precious metal, can affect the exchange rates (but not the rate with the country in which it is invested) only in so far as the production of these exported commodities requires an additional import of other foreign goods. But then this production cannot balance out the extra import. The same is true with any export on credit, irrespective of whether capital investment or ordinary trade is involved. This extra import, however, can react to produce an extra demand for English goods, e.g. from the colonies or the U.S.A.
*
Newmarch previously said [1786] that English exports to India were greater than imports, as a result of the East India Company’s drafts. Sir Charles Wood cross-examines him on this point. This excess of English exports to India over imports from India is in fact brought into being by an import from India for which England does not pay any equivalent: the East India Company’s drafts (now the Indian government’s) boil down to a tribute extracted from India. In 1855, for example, English imports from India came to £12,660,000; English exports to India were £10,350,000. A balance of £2 1/4 million in India’s favour.
‘If that was the whole state of the case, that £2,250,000 would have to be remitted in some form to India. But then come in the advertisements from the India House. The India House advertise to this effect that they are prepared to grant drafts on the various presidencies in India to the extent of £3,250,000.’ (This amount was levied for the London expenses of the East India Company and for the dividends to be paid to stockholders.) ‘And that not merely liquidates the £2,250,000 which arose out of the course of trade, but it presents £1,000,000 of surplus’ (1917).
1922. (Wood:) ‘Then the effect of those India House drafts is not to increase the exports to India, but pro tanto to diminish them?’
(He should say, to reduce by that amount the need to cover imports from India by exports.) Mr Newmarch explains this by the fact that the English export ‘good government’ to India for this £3,700,000 (1925). As Minister for India, Wood knew all about the kind of ‘good government’ that was exported by the English, and he rightly says, not without irony (1926): ‘Then the export, which, you state, is caused by the East India drafts, is an export of good government, and not of produce.’
England exports a good deal of ‘good government’ in this way, and also much capital investment in foreign countries, thus receiving imports that are quite separate from the usual run of business; in part this is a tribute for the ‘good government’ which has been exported, in part a revenue from capital invested in the colonies and elsewhere, i.e. a tribute for which it does not have to pay any equivalent. It is therefore evident that the rate of exchange is unaffected if England simply consumes this tribute without exporting anything in return. It is also clear that the rate of exchange is still unaffected if it reinvests this tribute not in England but abroad, either productively or unproductively; if for example it uses it to send munitions to the Crimea. Besides, in so far as imports from abroad come into England’s revenue – and these must of course either be paid as tribute, in which case no equivalent is needed, or paid for by the exchange of this unpaid tribute, or else in the ordinary run of trade – England can either consume these or alternatively invest them again as capital. Neither the one thing nor the other disturbs the rate of exchange, and this is overlooked by the wise Wilson. Whether it is domestic or foreign products that form a portion of the revenue – the latter case simply presupposing the exchange of domestic products for foreign – the consumption of this revenue, productively or unproductively, in no way affects the rate of exchange, even if it does affect the volume of production. The following extracts should be judged accordingly.
1934. Wood inquires how the sending of war supplies to the Crimea would affect the exchange rate with Turkey. Newmarch replies: ‘I do not see that the mere transmission of warlike stores would necessarily affect the exchange, but certainly the transmission of treasure would affect the exchange.’ Here, therefore, he distinguishes between capital in the money form and other capital. But Wilson then asks whether:
‘1935. If you make an export of any article to a great extent, for which there is to be no corresponding import’ (Mr Wilson forgets that England receives very substantial imports for which there have never been corresponding exports, save in the form of ‘good government’ or capital previously exported for investment; in any case imports that are not part of the regular movement of trade. But these imports may in turn be exchanged, say, for American products, and if these American products are exported without corresponding imports, this in no way alters the fact that the value of these imports can be consumed without any equivalent outflow abroad; these imports were received without matching exports, and they can therefore also be consumed without entering into the balance of trade), ‘you do not discharge the foreign debt you have created by your imports’ (but if you have already paid for these imports previously, e.g. by credit given abroad, no debt is created for them, and the question has nothing at all to do with the international balance; it is a simple matter of productive or unproductive expenditure, irrespective of whether the products consumed in this way are domestic products or foreign) ‘and therefore you must by that transaction affect the exchanges by not discharging the foreign debt, by reason of your export having no corresponding imports? – That is true as regards countries generally.’
What Wilson’s lecture boils down to is that every export without a corresponding import is at the same time an import without a corresponding export; since foreign and thus imported commodities also enter into the production of the article exported. The assumption is that any such export is either based on an unpaid import or gives rise to one – i.e. a debt abroad. This is wrong, even leaving aside the following two circumstances: (1) England gets certain imports gratis and does not pay any equivalent for them, e.g. a part of its Indian imports. It can exchange these for American imports, and export the latter without matching imports; in any case, as far as the value is concerned, it has only exported something that cost it nothing. And (2) it may have paid for imports, e.g. American ones, that form additional capital; if these are consumed unproductively, e.g. in war materials, this does not create a debt to America and does not affect the exchange rate with America. Newmarch contradicts himself in questions 1934 and 1935, and Wood draws his attention to this in question 1938: ‘If no portion of the goods which are employed in the manufacture of the articles exported without return’ (war materials) ‘came from the country to which those articles are sent, how is the exchange with that country affected; supposing the trade with Turkey to be in an ordinary state of equilibrium, how is the exchange between this country and Turkey affected by the export of warlike stores to the Crimea?’
At this point Newmarch loses his calm demeanour; he forgets that he has already answered this simple question correctly under question 1934, and says: ‘We seem, I think, to have exhausted the practical question, and to have now attained a very elevated region of metaphysical discussion.’
*
(Wilson has still a further version of his contention that the rate of exchange is affected by every transfer of capital from one country to another, no matter whether this takes place in the form of precious metal or of commodities. Wilson knows of course that the exchange rate is affected by the rate of interest, particularly by the relationship between the interest rates prevailing in the two countries whose reciprocal exchange rate is in question. If he can then prove that an excess of capital in general, and thus first of all in commodities of all kinds, including precious metal, also contributes towards determining the rate of interest, he will already be one step nearer his goal; the transfer of a significant portion of this capital to another country must then alter the rate of interest in both countries, and moreover in contrary directions, thus in the second place also the rate of exchange between the two countries. – F. E.)
Wilson goes on to say in The Economist, of which he was at that time the editor (1847, p. 574):
‘… No doubt, however, such abundance of capital as is indicated by large stocks of commodities of all kinds, including bullion, would necessarily lead, not only to low prices of commodities in general, but also to a lower rate of interest for the use of capital’ (1). ‘If we have a stock of commodities on hand, which is sufficient to serve the country for two years to come, a command over those commodities would be obtained for a given period, at a much lower rate than if the stocks were barely sufficient to last us two months’ (2). ‘All loans of money, in whatever shape they are made, are simply a transfer of a command over commodities from one to another. Whenever, therefore, commodities are abundant, the interest of money must be low, and when they are scarce, the interest of money must be high’ (3). ‘As commodities become abundant, the number of sellers, in proportion to the number of buyers, increases, and, in proportion as the quantity is more than is required for immediate consumption, so must a larger portion be kept for future use. Under these circumstances, the terms on which a holder becomes willing to sell for a future payment, or on credit, become lower than if he were certain that his whole stock would be required within a few weeks’ (4).
With regard to statement (1), we should note that a large influx of precious metal can take place at the same time as a contraction in production, this being always the case in the period after a crisis. In the following phase, precious metal may flow in from countries where this is mainly produced; the import of other commodities is generally balanced in this period by exports. In both these phases, the rate of interest is low and rises only slowly, for reasons we have already given. This low rate of interest can be explained in all cases without in any way bringing in ‘large stocks of commodities of all kinds’. And how are these supposed to have their effect? The low price of cotton, for example, enables the spinner, etc. to make high profits. Why then is the interest rate low? Certainly not because the profit that can be made with borrowed capital is high. But purely and simply because, under the existing conditions, the demand for loan capital does not grow in relation to this profit; i.e. loan capital has a different movement from industrial capital. What The Economist is seeking to prove is precisely the opposite: that its movement is identical with the movement of industrial capital.
As for statement (2), if we scale down the absurd assumption of stocks for two years in advance in order to give it some possible sense, this supposes that the commodity market is oversupplied. This would lead to a fall in prices. Less would have to be paid for a bale of cotton. But this in no way means that the money needed to purchase a bale of cotton is cheaper to come by. That depends on the state of the money market. If it is cheaper to come by, this is only because the commercial credit situation is such that it has less need to resort to bank credit than is usual. The commodities that flood the market are means of subsistence or means of production. A low price for either increases the industrial capitalist’s profit. How could a low price reduce interest if the abundance of industrial capital and the demand for monetary accommodation were not opposite phenomena instead of being identical? Conditions are such that the merchant and industrialist can give each other easy credit; because of this easing of commercial credit, both industrialist and merchant need less bank credit; hence the rate of interest can be low. This low rate of interest has nothing to do with the influx of precious metal, though the two may coexist, and the same causes that lead to low prices for imported articles may also lead to an excess influx of precious metal. If the import market really was flooded, this would mean a decline in the demand for imported goods, which would be inexplicable given the low prices, unless it were due to a contraction in domestic industrial production; but this would again be inexplicable, given the excess of imports at low prices. A mass of absurdities, in order to show that a fall in prices equals a fall in interest. The two things may simultaneously occur alongside one another. But then they express a movement of industrial capital and loanable money capital in opposite directions, and not in the same direction.
Why, with regard to (3), the interest on money should be low when there is an abundance of commodities is not to be seen even with this further explanation. If commodities are cheap, I need, say, £1,000 to buy a certain quantity, instead of £2,000 as previously. But perhaps I still invest £2,000 and use this to buy double the amount of commodities I did before, expanding my business by advancing the same capital, which I might have to borrow. Now, as before, I spend £2,000. My demand on the money market thus remains the same, even though my demand on the commodity market rises with the fall in commodity prices. But if my demand decreases, i.e. if production does not expand with the fall in commodity prices, which would contradict all The Economist’s laws, the demand for loanable money capital would decline, even though profit increased; this increasing profit would however create a demand for loan capital. A low level of commodity prices, moreover, may arise for three reasons. Firstly, from a lack of demand. In that case, the rate of interest, is low because production is paralysed, not because commodities are cheap, the cheapness simply being an expression of this paralysis. Or else because the supply is too large in relation to the demand. This may result from an oversupply of markets, etc. that leads to a crisis, and may coincide during the crisis itself with a high rate of interest. Or it may be because the value of commodities has fallen, i.e. the same demand can be satisfied at a lower price. Why should the rate of interest fall in this last case? Because profit grows? If it is because less money capital is needed to obtain the same productive or commodity capital, this simply proves that profit and interest stand in inverse proportion to one another. In any case, The Economist’s general thesis is wrong. Low money prices for commodities and a low rate of interest do not necessarily go together. If this were the case, the interest rate would be lowest in the poorest countries, where the money prices of products are lowest, and highest in the richest countries, where the money prices of agricultural products are highest. In general, The Economist concedes that, if the value of money falls, this has no influence on the rate of interest. £100 still yields £105; if the £100 is worth less, so too is the £5. The ratio is not affected by a rise or fall in the value of the original sum. Considered as value, a certain quantity of commodities is equal to a certain sum of money. If its value rises, it is equal to a greater sum of money; if it falls, the converse is true. If it is £2,000, then 5 per cent is £100; if it is £1,000, 5 per cent is £50. But this in no way affects the interest rate. The element of truth in all this is simply that more monetary accommodation is required when £2,000 is needed to buy the same quantity of commodities than when only £1,000 is needed. All this shows, however, is that the ratio between profit and interest is an inverse one. For profit grows with the cheapening of the elements of constant and variable capital, while interest falls. However, the converse can also be the case, and frequently is so. Cotton may be cheap, for example, because there is no demand for yarn and cloth; it can be relatively dear because large profits in the cotton industry lead to a great demand for it. On the other hand, the industrialists’ profits may be high precisely because the price of cotton is low. Hubbard’s list* shows that the interest rate and commodity prices exhibit completely independent movements; while the movements of the interest rate are precisely correlated with the movements of the metal reserve and the rate of exchange.
The Economist says: ‘Whenever, therefore, commodities are abundant, the interest of money must be low.’ Precisely the opposite is the case during crises; commodities are there in excess, not convertible into money, and the rate of interest is therefore high. In another phase of the cycle, there is a great demand for commodities and hence easy returns, but at the same time a rise in commodity prices, and a low rate of interest on account of these easy returns. ‘When they’ (commodities) ‘are scarce, the interest of money must be high.’ The opposite is again the case in the slack period following the crisis. Commodities are scarce in absolute terms, but not in relation to demand, and the interest rate is low.
As far as statement (4) goes, it is quite obvious that when the market is flooded, an owner of commodities sells off his stock more cheaply – If he can sell it at all – than when there is a prospect of stocks becoming rapidly exhausted. It is less clear why the interest rate should fall on this account.
If the market is flooded with imported goods, the interest rate may rise as a result of a greater demand for loan capital on the part of the owners of these goods, who hope in this way to avoid having to put them on the market. It may fall, because the ease of commercial credit still keeps the demand for bank credit relatively low.
*
The Economist mentions the rapid effect on the exchange rates in 1847 which resulted from the increase in the interest rate and other pressure on the money market. But it should not be forgotten that despite the turn in the exchange rates, gold continued to flow out until the end of April; the turning-point here only occurred at the beginning of May.
On 1 January 1847, the Bank’s metal reserve was £15,066,691; the rate of interest 3 per cent. The three-month exchange rate on Paris was 25.75, on Hamburg 13.10, on Amsterdam 12.3 1/4. By 5 March, the metal reserve had fallen to £11,595,535; the Bank rate had risen to 4 per cent; the exchange rate fell to 25.66 1/2 on Paris, 13.9 1/4 on Hamburg, 12.2 1/2 on Amsterdam. The drain of gold persisted; see the following table:
Bullion reserve of the Bank of England (£) |
Money market |
Highest three-month rates |
|||
|
|
|
Paris |
Hamburg |
Amsterdam |
20 March |
11,231,630 |
Bank disc. 4% |
25.67 1/2 |
13.9 3/4 |
12.2 1/2 |
3 April |
10,246,410 |
” ” 5% |
25.80 |
13.10 |
12.3 1/2 |
10 April |
9,867,053 |
Money very Scarce |
25.90 |
13.10 1/3 |
12.4 1/2 |
17 April |
9,329,841 |
Bank disc. 5.5% |
26.02 1/2 |
13.10 3/4 |
12.5 1/2 |
24 April |
9,213,890 |
Pressure |
26.05 |
13.12 |
12.6 |
1 May |
9,337,716 |
Increasing pressure |
26.15 |
13.12 3/4 |
12.6 1/2 |
8 May |
9,588,759 |
Highest pressure |
26.27 1/2 |
13.15 1/2 |
12.7 3/4 |
In 1847, the total export of precious metal from England came to £8,602,597.
Of this there went to the United States |
£3,226,411 |
to France |
£2,479,892 |
to the Hanse towns |
£958,781 |
to Holland |
£247,743 |
Despite the turn in the exchange rates at the end of March, the drain of gold lasted a whole month longer, its probable destination being the United States.
‘We thus see’ (says The Economist, 1847 p. 954) ‘how rapid and striking was the effect of a rise in the rate of interest, and the pressure which ensued in correcting an adverse exchange, and in turning the tide of bullion back to this country. This effect was produced entirely independent of the balance of trade. A higher rate of interest caused a lower price of securities, both foreign and English, and induced large purchases to be made on foreign account, which increased the amount of bills to be drawn from this country, while, on the other hand, the high rate of interest and the difficulty of obtaining money was such that the demand of those bills fell off, while their amount increased… For the same cause orders for imports were countermanded, and investments of English funds abroad were realized and brought home for employment here. Thus, for example, we read in the Rio de Janeiro Price Current of the 10th May, “Exchange (on England – F.E.) has experienced a further decline, principally caused by a pressure on the market for remittance of the proceeds of large sales of (Brazilian – F.E.) government stock, on English account.” Capital belonging to this country, which has been invested in public and other securities abroad, when the interest was very low here, was thus again brought back when the interest became high.’
India alone has to pay £5 million in tribute for ‘ good government’, interest and dividends on British capital, etc., and this does not include the sums sent home each year for investment in England, partly by officials as savings from their salaries and partly by merchants as a portion of their profits. The same remittances are constantly made from every British colony, for the same reasons. Most banks in Australia, the West Indies and Canada were founded with British capital, the dividends being paid in England. England also possesses many bonds issued by foreign governments – European, North American and South American – on which it receives interest. On top of this there is its participation in foreign railways, canals, mines, etc., with dividends accordingly. The remittances under all these heads are made almost exclusively in products over and above the total of English exports. Only an infinitesimal sum, on the other hand, goes abroad to the owners of English securities and for the consumption of English residents.
The question as to how this affects the balance of trade and the exchange rates is ‘at any particular moment one of time’. ‘Practically speaking… England gives long credits upon her exports, while the imports are paid for in ready money. At particular moments this difference of practice has a considerable effect upon the exchanges. At a time when our exports are very considerably increasing, e.g., 1850, a continual increase of investment of British capital must be going on… in this way remittances of 1850 may be made against goods exported in 1849. But if the exports of 1850 exceed those of 1849 by more than 6 million, the practical effect must be that more money is sent abroad, to this amount, than returned in the same year. And in this way an effect is produced on the rates of exchange and the rate of interest. When, on the contrary, our trade is depressed after a commercial crisis, and when our exports are much reduced, the remittances due for the past years of larger exports greatly exceed the value of our imports; the exchanges become correspondingly in our favour, capital rapidly accumulates at home, and the rate of interest becomes less’ (The Economist, 11 January 1851).
The foreign exchange rates can alter:
(1) As a result of the temporary balance of payments, whatever may be the causes determining this; these may be purely commercial, or may involve capital investment abroad or state expenditures, as in war, etc. – in so far as cash payments are made abroad in this connection.
(2) As the result of a devaluation of money in one country, either of metal money or of paper. This change is purely nominal. If £1 subsequently represented only half as much money as before, it would obviously be reckoned at 12 1/2 French francs instead of at 25.
(3) When the rate of exchange is between countries, one of which uses silver as ‘money’, the other gold, it is dependent on the relative fluctuations in value of these two metals, since such fluctuations obviously alter the parity between the two. An example of this was in 1850, when the exchange rate was unfavourable to England even though its exports rose enormously. There was still no drain of gold, for all that. This was the effect of the temporary rise in the value of silver as against gold. (See The Economist, 30 November 1850.)
Exchange rate parity for £1 is 25 francs 20 centimes in Paris, 13 banco marks 10 1/2 schillings in Hamburg, 11 florins 97 cents in Amsterdam. In proportion as the exchange rate on Paris rises above 25.20, it becomes more favourable for the English debtor to France or for the purchaser of French commodities. In both cases less sterling is needed. In more distant countries, where precious metal is not so easy to come by, if bills of exchange are scarce and insufficient for the remittances to be made to England, the natural effect is to drive up the prices of those products that are customarily shipped to England, since a greater demand for these now arises, with the purpose of sending them to England instead of bills of exchange: this is often the case in India.
An unfavourable rate of exchange, and even a drain of gold, may arise in England if there is a very great surplus in money, a low rate of interest and a high price for securities.
In the course of 1848, England received large quantities of silver from India, since good bills were scarce and mediocre ones not readily accepted as a result of the 1847 crisis and the great lack of credit in trade with India. This silver had scarcely arrived before it all found its way to the Continent, where the revolution led to hoarding on all sides. The same silver largely flowed back to India in 1850, since the exchange rate now made this profitable.
*
The monetary system is essentially Catholic, the credit system essentially Protestant. ‘The Scotch hate gold.’ As paper, the monetary existence of commodities has a purely social existence. It is faith that brings salvation. Faith in money value as the immanent spirit of commodities, faith in the mode of production and its predestined disposition, faith in the individual agents of production as mere personifications of self-valorizing capital. But the credit system is no more emancipated from the monetary system as its basis than Protestantism is from the foundations of Catholicism.