Capital Vol. III Part V
Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital

Chapter 34. The Currency Principle and the English Bank Legislation of 1844


[In a former work, Ricardo's theory on the value of money as related to commodity-prices has been analysed; we can, therefore, confine ourselves here to the indispensable. According to Ricardo, the value of metallic money is determined by the labour-time incorporated in it, but only as long as the quantity of money stands in correct relationship to the amount and price of commodities to be exchanged. If the quantity of money rises above this ratio, its value falls and commodity-prices rise; if it fails below the correct ratio, its value rises and commodity-prices fall — assuming all other conditions equal. In the first case, the country in which this excess gold exists will export the gold whose value has depreciated and import commodities; in the second case, gold will flow to those countries in which it is assessed above its value, while the under-assessed commodities flow from these countries to other markets, where they command normal prices. Since under these circumstances "gold itself may become, either as coin or bullion, a token of metallic value of greater or smaller magnitude than its own value, it is self-evident that convertible bank-notes in circulation must share the same fate. Although bank-notes are convertible, and therefore their real value corresponds to their nominal value, the aggregate currency consisting of metal and of convertible notes may appreciate or depreciate in accordance with its aggregate quantity, for reasons already stated, rising above or falling below the level determined by the exchange-value of circulating commodities and the metallic value of gold.... This depreciation, not of paper as compared with gold, but of gold and paper taken together, or of the aggregate currency of a country, is one of Ricardo's principal discoveries which Lord Overstone and Co. pressed into their service and made a fundamental principle of Sir Robert Peel's bank legislation of 1844 and 1845." (Zur Kritik der Politischen Ökonomie, p.155.)

We need not here repeat a demonstration of the incorrectness of this Ricardian theory which is given in the cited work. We are merely interested in the way Ricardo's theses were elaborated by that school of bank theorists who dictated Peel's above-mentioned Bank Acts.

"The commercial crises of the 19th century, especially the great crises of 1825 and 1836, did not result in any new developments in the Ricardian theory of money, but they did furnish new applications for it. These were no longer isolated economic phenomena, such as the depreciation of precious metals in the 16th and 17th centuries according to Hume, or the depreciation of paper money in the 18th and early 19th centuries according to Ricardo; these were instead the violent storms in the world-market wherein the conflict of all elements of the capitalist production process discharges itself, and whose origin and cure were sought in the most superficial and abstract sphere of this process, the sphere of money circulation. The actual theoretical assumption from which the school of economic weather prophets proceeds, is actually reduced to the dogma that Ricardo discovered the laws governing the purely metallic currency. The only thing remaining for them to do was to subordinate credit and bank-note circulation to these laws.

"The most general and palpable phenomenon in commercial crises is the sudden general decline in prices following a prolonged overall rise. The general decline in commodity-prices may be expressed as a rise in the relative value of money with respect to all commodities, and the general price rise as a decline in the relative value of money. In either expression the phenomenon is described but not explained.... The different wording leaves the problem as little changed as would its translation from German into English. Ricardo's theory of money was therefore exceedingly opportune, because it lends to a tautology the semblance of a statement of causal relationship. Whence comes the periodic general fall in commodity-prices? From the periodic rise of the relative value of money. Whence the general periodic rise in prices? From the periodic decline in the relative value of money. It might have been stated with equal truth that the periodic rise and fall of prices is due to their periodic rise and fall. ...Once the tautology is admitted as a causal relationship, the rest follows easily. A rise in commodity-prices is caused by a decline in the value of money and a decline in the value of money is caused, as we know from Ricardo, by an over-supply of currency, i.e., a rise in the volume of currency over the level determined by its own intrinsic value and the intrinsic value of commodities. Similarly, a general decline in commodity-prices is explained by a rise in the value of money above its intrinsic value in consequence of under-supply of currency. Thus, prices rise and fall periodically, because there is periodically too much or too little money in circulation. Should a price rise happen to coincide with contracted money circulation, and a fall in prices with expanded circulation, it may be asserted despite this that the quantity of money in circulation has, though not absolutely, yet relatively increased or declined in consequence of a contraction or expansion of the volume of commodities in the market, even if this cannot be statistically proved. We have seen that according to Ricardo these general price fluctuations must take place even with a purely metallic currency, but that they alternatively balance one another; thus, e.g., an under-supply of currency causes a fall in prices, the export of commodities abroad, but this export causes an import of gold from abroad, which in turn brings about a price rise; the opposite movement taking place in the case of an over-supply of currency, when commodities are imported and gold is exported. But, since despite these general price fluctuations which are in perfect accord with Ricardo's metallic currency, their turbulent and violent form, their crisis form, belongs to the period of developed credit system, it is crystal clear that the issue of bank-notes is not exactly regulated by the laws of metallic currency. Metallic currency has its remedy in the import and export of precious metal, which immediately enters circulation as coin and thus, by its inflow or outflow, causes commodity-prices to fall or rise. The same effect on prices must now be exerted artificially by banks through imitating the laws of metallic currency. If gold is coming in from abroad it proves that currency is in under-supply, that the value of money is too high and commodity-prices too low, and, consequently, that bank-notes must be put into circulation in proportion to the newly imported gold. On the other hand, notes must be withdrawn from circulation in proportion to the gold exported from the country. The issue of bank-notes, in other words, must be regulated by the import and export of precious metal or by the rate of exchange. Ricardo's false assumption that gold is only coin, and, therefore, all imported gold swells the currency, causing prices to rise, while all exported gold reduces the currency, leading to a fall in prices — this theoretical assumption is here turned into the practical experiment of putting an amount of coin in circulation equal in every case to the amount of gold available. Lord Overstone (banker of Jones Loyd), Colonel Torrens, Norman, Clay, Arbuthnot and a host of other writers, known in England as advocates of the 'Currency Principle', have not only preached this doctrine, but succeeded in 1844 and 1845 with the aid of Sir Robert Peel's Bank Acts in making it the basis of English and Scottish bank legislation. Its ignominious failure, both theoretical as well as practical, following upon experiments on the broadest national scale, can be treated only in connection with the theory of credit." (Loc. cit., pp. 165-68.)

The critique of this school was furnished by Thomas Tooke, James Wilson (in the Economist of 1844 to 1847) and John Fullarton. But we have seen on several occasions, particularly in Chapter XXVIII of this book, how incompletely they, too, saw through the nature of gold, and how unclear they were about the relationship of money and capital. We quote here merely a few instances in connection with the transactions of the Committee of the Lower House of 1857 concerning Peel's Bank Acts (B. C. 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 presents two tables covering the years 1834 to 1843, and 1845 to 1853, which show that the price variations of fifteen major commercial articles were quite independent of the export and import of gold and the interest rate. On the other hand, they show a close connection between the export and import of gold, which is, indeed, the "representative of our uninvested capital," and the interest rate.

"[2402] 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 major articles on which the following tables of Hubbard are based include cotton, cotton yarn, cotton fabrics, wool, woollen cloth, flax, linen, indigo, pig-iron, tin, copper, tallow, sugar, coffee, and silk.

I. 1834-1843

Date Bullion Reserve of Bank £ Market Rate of Discount * Price increase Price Decrease
1834, March 1 9,104,000 2¾% - - -
1835, March 1 6,274,000 3¾% 7 7 1
1836, March 1 7,918,000 3¼% 11 3 1
1837, March 1 4,077,000 5% 5 9 1
1838, March 1 10,471,000 2¾% 4 11 -
1839, Sept. 1 2,684,000 6% 8 5 2
1840, June 1 4,571,000 4¾% 5 9 1
1840, Dec. 1 3,642,000 5¾% 7 6 2
1841, Dec. 1 4,873,000 5% 3 2 -
1842, Dec. 1 10,603,000 2½% 2 13 -
1843, June 1 11,566,000 2¼% 1 14 -

Price changes on 15 major items

II. 1844-1853

Date Bullion Reserve of Bank £ Market Rate of Discount Price Increase Price Decrease
1844, March 1 16,162,000 2¼% - - -
1845, Dec 1 13,237,000 4½% 11 4 -
1846, Sept. 1 16,366,000 3% 7 8 -
1847, Sept. 1 9,140,000 6% 6 6 3
1850, March 1 17,126,000 2½% 5 9 1
1851, June 1 13,705,000 3% 2 11 2
1852, Sept. 1 21,853,000 1¾% 9 5 1
1853, Dec. 1 15,093,000 5% 14 - 1

Price changes on 15 major items

Hubbard comments in this regard:

"As in the 10 years 1834-43, so in 1844-53, movements in the bullion of the Bank were invariably accompanied by a decrease or increase in the loanable value of money advanced on discount; and 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 at the Bank of England" (Bank Acts Report, 1857, II, pp. 290, 291).

Since the demand and supply of commodities regulate their market-prices, it becomes evident here how wrong Overstone is in identifying the demand for loanable money-capital (or rather the deviations of supply therefrom), as expressed by the discount rate, with the demand for actual "capital." The contention that commodity-prices are regulated by fluctuations in the quantity of currency is now concealed by the phrase that discount rate fluctuations express fluctuations in the demand for actual material capital, as distinct from money-capital. We have seen that before the same Committee both Norman and Overstone actually contended this, and that the latter especially was compelled to resort to very lame subterfuges, until he was finally cornered (Chap. XXVI). It is indeed an old humbug that changes in the existing quantity of gold in a particular country must raise or lower commodity-prices within this country by increasing or decreasing the quantity of the medium of circulation. If gold is exported, then, according to this Currency Theory, commodity-prices must rise in the country importing this gold, and thereby the value of exports from the gold-exporting country on the gold-importing country's market; on the other hand, the value of the gold-importing country's exports would fall on the gold-exporting country's market while it would rise on the domestic market, i.e., the country receiving the gold. But, in fact, a decrease in the quantity of gold raises only the interest rate, whereas an increase in the quantity of gold lowers the interest rate; and if not for the fact that the fluctuations in the interest rate enter into the determination of cost-prices, or in the determination of demand and supply, commodity prices would be wholly unaffected by them.

In the same report, N. Alexander, head of a large firm doing business with India, expresses the following views on the heavy drain of silver to India and China in the mid-fifties. This was partly due to the Chinese Civil War, which checked the sale of English fabrics in China, and partly due to the disease among silkworms in Europe, which sharply reduced silkworm breeding 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 of 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."

In other words, silver, the money metal of that continent, was sent to Asia instead of commodities, not because commodity-prices had risen in the country which produced them (England), but because prices had fallen, as a result of over-imports in the country which imported them; and this despite the fact that the silver was received by England from France and had to be paid for partly in gold. According to the Currency Theory, prices should have fallen in England and risen in India and China as a result of such imports.

Another illustration. Before the Lords' Committee (C. D. 1848/57), Wylie, one of the first Liverpool merchants, testifies as follows:

"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 10½ and 11½d. per pound, and in some instances the spinners realised a profit equal to the first cost of the cotton." — "1996. The trade continued to be remunerative until the beginning of 1846." — "2000. On March 3, 1844, the stock of cotton [627,042 bales] was more than double what it is this day [on March 3, 1848, when it was 301,070 bales] and yet the price then was 1¼d. per pound dearer." [6¼d. as against 5d.] — At the same time yarn, good secunda mule twist No. 40, had fallen from 11½-12d. to 9½d. per lb. in October, and to 7¾d. 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 shows the self-interest of Overstone's sagacity according to which money should be "dear" because capital is "scarce." On March 3, 1844, the bank interest rate stood at 3%; in October and November of 1847 it rose to 8 and 9%, and was still 4% on March 3, 1848. The prices of cotton were depressed far below the price which corresponded to the state of supply by the complete stoppage of sales and the panic with its ensuing high rate of interest. As a result, there was an enormous decrease in imports in 1848, on the one hand, and, on the other, a decrease in production in America; hence a new rise in cotton prices in 1849. According to Overstone, the commodities were too dear because 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."

How nicely Overstone confuses prices, or the value of commodities, with the value of money, that is, the interest rate. In his reply to Question 2026, Wylie sums up his general judgement of the Currency Theory, based on 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 says, furthermore, concerning the effects of this Bank Act on business in general:

"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 October 25 (suspension of the Bank Act), when those four months' bills became discountable" (2097).

We see, then, that the suspension of this Bank Act was received with relief in the provinces as well.

"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." — "2463. 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 protracted aftermath, followed in 1842 by a regular post-crisis, and the self-interested blindness of industrialists and merchants, who absolutely refused to see any over-production — for such a thing was absurd and impossible according to vulgar economy — had ultimately achieved that confusion of thought which enabled the Currency School to put its dogma into practice on a national scale. The bank legislation of 1844 and 1845 was passed.

The Bank Act of 1844 divides the Bank of England into an issue department and a banking department. The former receives securities — principally government obligations — amounting to 14 million, and the entire metal hoard, of which not more than one-quarter is to consist of silver, and issues notes to the full amount of the total. In so far as these notes are not in the hands of the public, they are held in the banking department and, together with the small amount of coin required for daily use (about one million), constitute its ever ready reserve. The issue department gives the public gold for notes and notes for gold; the remaining transactions with the public are carried on by the banking department. Private banks in England and Wales authorised in 1844 to issue their own notes retained this privilege, but their note issue was fixed; if one of these banks ceases to issue its own notes, the Bank of England can increase its unbacked notes by two-thirds of the quota thus made available; in this way its issue was increased by 1892 from £14 to £16½ million (to be exact, £16,450,000).

Thus, for every five pounds in gold which leave the bank treasury, a five-pound note returns to the issue department and is destroyed; for every five sovereigns going into the treasury a new five-pound note comes into circulation. In this manner, Overstone's ideal paper circulation, which strictly follows the laws of metallic circulation, is carried out in practice, and by this means, according to the advocates of the Currency Theory, crises are made impossible for all time.

But in reality the separation of the Bank into two independent departments deprived its management of the possibility of freely utilising its entire available means at critical times, so that situations could arise in which the banking department might be on the verge of bankruptcy while the issue department still had intact several millions in gold and, in addition, its entire 14 million in securities. And this could take place so much more easily since there is a period in almost every crisis when heavy exports of gold take place which must be covered in the main by the metal reserve of the bank. But for every five pounds in gold which then go abroad, the domestic circulation is deprived of a five-pound note, so that the quantity of circulating medium is reduced precisely at a time when the largest quantity is most needed. The Bank Act of 1844 thus directly induces the entire commercial world forthwith to hoard a reserve fund of bank-notes at the outbreak of a crisis; in other words, to accelerate and intensify the crisis. By such artificial intensification of demand for money accommodation, that is, for means of payment at the decisive moment, and the simultaneous restriction of the supply the Bank Act drives the rate of interest to a hitherto unknown height during a crisis. Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis. In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time.

It should also be mentioned that the 1844 legislation still shows traces recalling the first twenty years of the 19th century, the period when specie payments were suspended and notes devaluated. The fear that notes may lose their credit is still plainly in evidence. But this fear is quite groundless, since even in 1825 the issue of a discovered old supply of one-pound notes, which had been taken out of circulation, broke the crisis and proved thereby that the credit of the notes remained unshaken even in times of the most general and deepest mistrust. And this is quite understandable; for, after all, the entire nation backs up these symbols of value with its credit. — F.E.]

Let us now turn to a few comments on the effect of the Bank Act. John Stuart Mill believes that the Bank Act of 1844 [In the German 1894 edition this reads: 1847. — Ed] kept down over-speculation. Happily this sage spoke on June 12, 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.C. 1857, No. 2031.)

The sagacious Mr. Mill thinks that if one-pound notes are 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" [2066].

Does Mr. Mill assume, then, that manufacturers will pay higher wages because they pay them in paper instead of gold? Or does he believe that if a manufacturer receives his loan in £100 notes and exchanges them for gold, these wages would constitute less demand than if paid immediately in one-pound notes? And does he not know that, for instance, in certain mining districts wages were paid in the notes of local banks, so that several labourers together received one five-pound note? Does this increase their demand? Or will bankers advance money to manufacturers more easily and in larger quantities in small notes than in large ones?

[This singular fear which Mill has for one-pound notes would be inexplicable if his whole work on political economy did not reveal an eclecticism which shows no hesitation in the face of any contradiction. On the one hand, he agrees on many points with Tooke as opposed to Overstone; on the other, he believes that commodity-prices are determined by the quantity of available money. He is thus by no means convinced that, all other conditions being equal, a sovereign will find its way into the coffers of the Bank for every one-pound note issued. He fears that the quantity of circulating medium could be increased and thereby devaluated, that is, commodity-prices might rise. This and nothing more is concealed behind the above-mentioned apprehension. — F.E.)

Tooke expresses the following views before the C. D. 1848/57 concerning the division of the Bank into two departments and the excessive precautions taken to safeguard the cashing of notes:

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 bank-notes 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 one-pound notes of country banks; this vacuum could be filled only by gold, until such time as the Bank of England also issued one-pound 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 the bank-notes (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 testifies:

"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 60 in number, whereas the alterations prior to 1844 in the same space of time certainly did not amount to a dozen."

Of special interest is the testimony of Palmer, a Director of the Bank of England since 1811 and for a while its Governor, before the Lords' Committee on C. D. 1848/57:

"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 July 1, 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 10 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 purpose was to make money dear; aside from the Currency Theory, the separation of the two bank departments and the requirement for Scottish and Irish banks to hold gold in reserve for backing notes issued beyond a certain amount had the same purpose. This brought about a decentralisation of the national metal reserve, which decreased its capability of correcting unfavourable exchange rates. All the following stipulations aim to raise the interest rate: that the Bank of England shall not issue notes exceeding 14 million except against gold reserve; that the banking department shall be administered as an ordinary bank, forcing the interest rate down when money is plentiful and driving it, up when money is scarce; limiting the silver reserve, the principal means of rectifying the rates of exchange with the continent and Asia; the regulations concerning the Scottish and Irish banks, which never require gold for export but must now keep it under the pretence of ensuring an actually illusory convertibility of their notes. The fact is that the Act of 1844 caused a run on the Scottish banks for gold in 1857 for the first time. Nor does the new bank legislation make any distinction between a drain of gold abroad or for domestic purposes, although it goes without saying that their effects are quite different. Hence the continual large fluctuations in the market rate of interest. With reference to silver, Palmer says on two separate occasions, 992 and 994, that the Bank can buy silver for notes only when the rate of exchange is favourable for England, i.e., silver is superfluous; 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 have to raise the interest rate above its old level of 5% in times of stringency, so long as unfavourable exchange rates do not drain gold to foreign countries. Were it not for the Act of 1844, the Bank would be able to discount all first-class bills presented to it without difficulty. [1018-20.] But under the Act of 1844 and in the state 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" [1022].

And this high interest rate was precisely the purpose of the Act.

"1029. ... 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." — "4023. 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."

So speaks a man who has occupied a post for 39 years in the administration of the Bank of England. Let us now listen to a private banker, Twells, an associate of Spooner, Attwood & Co. since 1801. He is alone among the witnesses before the B. C. 4857 who provides us with an insight into the country's actual state of affairs and who sees the crisis approaching. In other respects, however, he is a sort of little-shilling man from Birmingham, like his associates, the Attwood brothers, who are the founders of this school. (See Zur Kritik der pol. Oek., S. 59.) He testifies:

"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 trades-man 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% to their proprietors? — The other day one of them was paying 18% and I think another 20%; 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 £400, 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."

4494. He declares that business is not profitable now. The following remarks of his are important because they show that he saw the latent existence of the crisis when none of the others had even an inkling of 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 the following case: A Frenchman sends a broker in Mincing Lane commodities for £3,000 to be sold at a certain price. The broker cannot obtain the requested price, and the Frenchman cannot sell below this price. The commodities remain unsold, but the Frenchman needs money. The broker therefore makes him an advance of £1,000 and has the French man draw a bill of exchange of £1,000 for three months on the broker against his commodities as security. At the end of the three months the bill becomes due, but the commodities still remain unsold. The broker must then pay the bill, and although he possesses security for £3,000, he cannot convert it into cash and as a result faces difficulties. In this manner, 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 man, then, is by no means of Overstone's opinion that a high rate of interest is the same as dear capital.

The following shows 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 last 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 that the credit of Bank of England notes is considered beyond question by all experts. Nevertheless, the Bank Act completely ties up nine to ten million in gold for the convertibility of these notes. The sacredness and inviolability of this reserve is thereby carried much farther than among hoarders of olden times. Mr. Brown (Liverpool) testifies, C. D. 1847/57:

"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, already cited earlier, whose testimony is also used to illustrate the modern building system in London (Vol. II, Ch. XII), sums up his opinion of the Bank Act of 1844 as follows [B. A. 1857]:

"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? — I think so. I know that it has operated so in the building trade."

As mentioned before, the Scottish banks were forced by the Bank Act of 1845 into a system resembling that of the English. They were obliged to hold gold in reserve for their note issue beyond the limit fixed for each bank. The effect of this may be seen from the following testimony before the C. D. 1848/57.

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."

Furthermore, 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, we quote an 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 disturbed by the Act of 1845:

"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." (Economist, October 23, 1847 [pp. 1214-1215].)

[And what does the father of the Bank Act, banker Samuel Jones Loyd, alias Lord Overstone, say to all this?

Already in 1848 he repeated before the Lords' Committee 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 bank-notes" (1514),

in spite of the fact that the mere authority to increase the note issue, given by the Government's Letter of October 25, 1847, had sufficed to take the edge off the crisis.

He holds to the view 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 the manufacturing industry had for months consisted in material commodity-capital filling the warehouses to overflowing and being actually unsaleable; so that for precisely this reason, material productive capital lay wholly or partly idle, in order not to produce still more unsaleable commodity-capital.

And before the Bank 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. C. 1857, No. 4189.)

To this song of praise by Overstone before the Committee on July 14, the antistrophe was given on November 12 of the same year in the shape of a letter to the Bank's management, in which the government suspended the miracle-working law of 1844 to save what could still be saved. — F. E.]