Capital Vol. III Part V
Division of Profit into Interest and Profit of Enterprise. Interest-
Bearing Capital
Chapter 35. Precious Metal and Rate of Exchange
I. MOVEMENT OF THE GOLD RESERVE
It should be noted in regard to the accumulation of notes in times of stringency, that it is a repetition of the hoarding of precious metal as used to take place in troubled times in the most primitive conditions of society. The Act of 1844 is interesting in its operation because it seeks to transform all precious metal existing in the country into a circulating medium; it seeks to equate a drain of gold with a contraction of the circulating medium and a return flow of gold with an expansion of the circulating medium. As a result, the experiment proved the contrary to be the case. With a single exception, which we shall mention shortly, the quantity of circulating notes of the Bank of England has never, since 1844, reached the maximum which it was authorised to issue. The crisis of 1857 proved on the other hand that this maximum does not suffice under certain circumstances. From November 13 to 30, 1857, a daily average of £488,830 above this maximum was circulating (B. A. 1858, p. XI). The legal maximum was at that time £14,475,000, plus the amount of metal reserve in the vaults of the Bank.
Concerning the outflow and inflow of precious metal, the following is to be noted:
First, a distinction should be made between the back and forth movement of metal within a region which does not produce any gold and silver, on the one hand, and, on the other, the flow of gold and silver from their sources of production to various other countries and the distribution of this additional metal among them.
Before the gold mines of Russia, California and Australia made Their influence felt, the supply since the beginning of the 19th century sufficed only for the replacement of worn-out coins, for general use in articles of luxury, and for the export of silver to Asia.
However, in the first place, silver exports to Asia have since increased extraordinarily, owing to the Asiatic trade of America and Europe. The silver exported from Europe was largely replaced by the additional supply of gold. Secondly, a portion of the newly imported gold was absorbed by internal money circulation. It is estimated that up to 1857 about 30 million in gold were added to England's internal circulation. [14] Furthermore, the average level of metal reserves in all the central banks of Europe and America increased since 1844. The expansion of domestic money circulation resulted at the same time in bank reserves growing more rapidly in the period of stagnation following upon the panic, because of the larger quantity of gold coins thrust out of domestic circulation and immobilised. Finally, the consumption of precious metal for luxury articles increased since the discovery of new gold deposits as a consequence of the increased wealth.
Secondly, precious metal flows back and forth between countries which do not produce any gold or silver, the same country continually importing, and also exporting. It is only the preponderance of this movement in one or another direction which, in the final analysis, determines whether a drain or an augmentation has taken place, since the mere oscillations and frequently parallel movements largely neutralise one another. But for this reason, in so far as the result is concerned, the continuity and, in the main, the parallel course of both movements is overlooked. A greater import or a greater export of precious metal is always interpreted to be solely the effect and expression of the relation between the imports and exports of commodities, whereas it is simultaneously indicative of the relation between exports and imports of precious metal itself, quite independent of commodity trade.
Thirdly, the preponderance of imports over exports, and vice versa, is measured on the whole by the increase or decrease in metal reserves of the central banks. The greater or lesser precision of this criterion naturally depends primarily on the degree of centralisation of the banking business in general. For on this depends the extent that precious metal in general accumulated in the so-called national banks represents the national metal reserve. But assuming this to be the case, the criterion is not accurate because an additional import may be absorbed under certain circumstances by domestic circulation and the growing consumption of gold and silver in producing luxury articles; furthermore, because without additional import, a withdrawal of gold coin for domestic circulation could take place, and thus the metal reserve could decrease even without a simultaneous increase in exports.
Fourthly, an export of metal assumes the aspect of a drain when the movement of decrease continues for a long time, so that the decrease represents a tendency of movement and depresses the metal reserve of the bank considerably below its average level, down to approximately its average minimum. This minimum is more or less arbitrarily fixed, in so far as it is differently determined in every individual case by legislation concerning backing for the cashing of notes, etc. Concerning the quantitative limits which such a drain can reach in England, Newmarch testified before the Committee on B. A. 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 lowest gold reserve level of the Bank of England, occurring on October 23, showed a decrease of £5,198,156 as compared with that of December 26, 1846, and a decrease of £6,453,748 as compared with the highest level of 1846 (August 29).
Fifthly, the determination of the metal reserve of the so-called national banks, a determination, however, which does not by itself regulate the magnitude of this metal hoard, for it can grow solely by the paralysis of domestic and foreign trade, is threefold: 1) reserve fund for international payments, in other words, reserve fund of world-money; 2) reserve fund for alternately expanding and contracting domestic metal circulation; 3) reserve fund for the payment of deposits and for the convertibility of notes (this is connected with the function of the bank and has nothing to do with the functions of money as such). The reserve fund can, therefore, also be influenced by conditions which affect every one of these three functions. Thus, as an international fund it can be influenced by the balance of payments, no matter by what factors the latter may be determined and whatever its relation to the balance of trade may be. As a reserve fund for domestic metal circulation it can be influenced by the latter's expansion or contraction. The third function — that of a security fund — does not, admittedly, determine the independent movement of the metal reserve, but has a two-fold effect. If notes are issued which replace metallic money (also including silver coins in countries where silver is a measure of value) in domestic circulation, the function of the reserve fund under 2) drops away. And a portion of the precious metal, which served to perform this function, will for a long time find its way abroad. In this case metallic coins are not withdrawn for domestic circulation, and thus the temporary augmentation of the metal reserve by immobilising a part of the circulating coined metal simultaneously falls away. Furthermore, if a minimum metal reserve must be maintained under all circumstances for the payment of deposits and for the convertibility of notes, this affects in its own way the results of a drain or return flow of gold; it affects that part of the reserve which the bank is obliged to maintain under all circumstances, or that part which it seeks to get rid of as useless at certain times. If the circulation were purely metallic and the banking system concentrated, the bank would likewise have to consider its metal reserve as security for the payment of its deposits, and a drain of metal could cause a panic such as was witnessed in Hamburg in 1857.
Sixthly, with the exception of perhaps 1837, the real crisis always broke out only after a change in the rates of exchange, that is, as soon as the import of precious metal had again gained preponderance over its export.
In 1825, the real crash came after the drain on gold had ceased. In 1839, there was a drain on gold, but it did not bring about a crash. In 1847, the drain on gold ceased in April and the crash came in October. In 1857, the drain on gold to foreign countries had ceased in early November, and the crash did not come until later that same month.
This is particularly evident in the crisis of 1847, when the drain on gold ceased in April after causing a slight preliminary crisis, and the real business crisis did not come until October.
The following testimony was presented at the Secret Committee of the House of Lords on Commercial Distress, 1848. This evidence was not printed until 1857 (also 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 rate of exchange favoured England since
August 1847, and an import of gold had taken place in
consequence, the bullion reserve of the Bank decreased.
"£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 and a Director of the Bank of England 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 bullion, which created an independent money panic in April 1847 was here therefore, as always, but a precursor of the crisis, and a turn had already taken place before it broke out. In 1839, a heavy drain of bullion took place for grain, etc., while business was strongly depressed, but there was no crisis or money panic.
Seventhly, as soon as general crises have spent themselves, gold and silver — leaving aside the inflow of new precious metal from the producing countries — distribute themselves once more in the proportions in which they existed in a state of equilibrium as individual hoards of the various countries. Other conditions being equal, the relative magnitude of a hoard in each country will be determined by the role of that country in the world-market. They flow from the country which had more than its normal share to those with less than a normal amount. These movements of outgoing and incoming metal merely restore the original distribution among the various national reserves. This redistribution, however, is brought about by the effects of various circumstances, which will be taken up in our treatment of rates of exchange. As soon as the normal distribution is once more restored — beginning with this moment — a stage of growth sets in and then again a drain. [This last statement applies, of course, only to England, as the centre of the world money-market. — F.E.]
Eighthly, a drain of metal is generally the symptom of a change in the state of foreign trade, and this change in turn is a premonition that conditions are again approaching a crisis. [15]
Ninthly, the balance of payments can favour Asia against Europe and America. [16]
An import of precious metal takes place mainly during two periods. On the one hand, it takes place in the first phase of a low interest rate, which follows upon a crisis and reflects a restriction of production; and then in the second phase, when the interest rate rises, but before it attains its average level. This is the phase during which returns come quickly, commercial credit is abundant, and therefore the demand for loan capital does not grow in proportion to the expansion of production. In both phases, with loan capital relatively abundant, the superfluous addition of capital existing in the form of gold and silver, i.e., a form in which it can primarily serve only as loan capital, must seriously affect the rate of interest and concomitantly the atmosphere of business in general.
On the other hand, a drain, a continued and heavy export of precious metal, takes place as soon as returns no longer flow, markets are overstocked, and an illusory prosperity is maintained only by means of credit; in other words, as soon as a greatly increased demand for loan capital exists and the interest rate, therefore, has reached at least its average level. Under such circumstances, which are reflected precisely in a drain of precious metal, the effect of continued withdrawal of capital, in a form in which it exists directly as loanable money-capital, is considerably intensified. This must have a direct influence on the interest rate. But instead of restricting credit transactions, the rise in interest rate extends them and leads to an over-straining of all their resources. This period, therefore, precedes the crash.
Newmarch is 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
pre-eminently convenient as a means of credit by
which capital can be raised."
Furthermore, as soon as somewhat threatening conditions induce the bank to raise its discount rate — whereby the probability exists at the same time that the bank will cut down the running time of the bills to be discounted by it — the general apprehension spreads that this will rise in crescendo. Everyone, and above all the credit swindler, will therefore strive to discount the future and have as many means of credit as possible at his command at the given time. These reasons, then, amount to this: it is not that the mere quantity of imported or exported precious metal as such which makes its influence felt, but that it exerts its effect, firstly, by virtue of the specific character of precious metal as capital in money-form, and secondly, by acting like a feather which, when added to the weight on the scales, suffices to tip the oscillating balance definitely to one side; it acts because it arises under conditions when any addition decides in favour of one or the other side. Without these grounds, it would be quite inexplicable why a drain of gold amounting to, say, £5,000,000 to £8,000,000 — and this is the limit of experience to date — should have any appreciable effect. This small decrease or increase of capital, which seems insignificant even compared to the £70 million in gold which circulate on an average in England, is really a negligibly small magnitude when compared to production of such volume as that of the English. [17] But it is precisely the development of the credit and banking system, which tends, on the one hand, to press all money-capital into the service of production (or what amounts to the same thing, to transform all money income into capital), and which, on the other hand, reduces the metal reserve to a minimum in a certain phase of the cycle, so that it can no longer perform the functions for which it is intended — it is the developed credit and banking system which creates this over-sensitiveness of the whole organism. At less developed stages of production, the decrease or increase of the hoard below or above its average level is a relatively insignificant matter. Similarly, on the other hand, even a very considerable drain of gold is relatively ineffective if it does not occur in the critical period of the industrial cycle.
In the given explanation we have not considered cases in which a drain of gold takes place as a result of crop failures, etc. In such cases the large and sudden disturbance of the equilibrium of production, which is expressed by this drain, requires no further explanation as to its effect. This effect is that much greater the more such a disturbance occurs in a period when production is in full swing.
We have also omitted from consideration the function of the metal reserve as a security for bank-note convertibility and as the pivot of the entire credit system. The central bank is the pivot of the credit system. And the metal reserve, in turn, is the pivot of the bank. [18] The change-over from the credit system to the monetary system is necessary, as I have already shown in Vol. I (Ch. III) in discussing means of payment. That the greatest sacrifices of real wealth are necessary to maintain the metallic basis in a critical moment has been admitted by both Tooke and Loyd-Overstone. The controversy revolves merely round a plus or a minus, and round the more or less rational treatment of the inevitable. [19] A certain quantity of metal, insignificant compared with the total production, is admitted to be the pivotal point of the system. Hence the superb theoretical dualism, aside from the appalling manifestation of this characteristic that it possesses as the pivotal point during crises. So long as enlightened economy treats "of capital" ex professo, it looks down upon gold and silver with the greatest disdain, considering them as the most indifferent and useless form of capital. But as soon as it treats of the banking system, everything is reversed, and gold and silver become capital par excellence, for whose preservation every other form of capital and labour is to be sacrificed. But how are gold and silver distinguished from other forms of wealth? Not by the magnitude of their value, for this is determined by the quantity of labour incorporated in them; but by the fact that they represent independent incarnations, expressions of the social character of wealth. [The wealth of society exists only as the wealth of private individuals, who are its private owners. It preserves its social character only in that these individuals mutually exchange qualitatively different use-values for the satisfaction of their wants. Under capitalist production they can do so only by means of money. Thus the wealth of the individual is realised as social wealth only through the medium of money. It is in money, in this thing, that the social nature of this wealth is incarnated. — F.E.] This social existence of wealth therefore assumes the aspect of a world beyond, of a thing, matter, commodity, alongside of and external to the real elements of social wealth. So long as production is in a state of flux this is forgotten. Credit, likewise a social form of wealth, crowds out money and usurps its place. It is faith in the social character of production which allows the money-form of products to assume the aspect of something that is only evanescent and ideal, something merely imaginative. But as soon as credit is shaken — and this phase of necessity always appears in the modern industrial cycle — all the real wealth is to be actually and suddenly transformed into money, into gold and silver — a mad demand, which, however, grows necessarily out of the system itself. And all the gold and silver which is supposed to satisfy these enormous demands amounts to but a few millions in the vaults of the Bank. [20]
Among the effects of the gold drain, then, the fact that production as social production is not really subject to social control, is strikingly emphasised by the existence of the social form of wealth as a thing external to it. The capitalist system of production, in fact, has this feature in common with former systems of production, in so far as they are based on trade in commodities and private exchange. But only in the capitalist system of production does this become apparent in the most striking and grotesque form of absurd contradiction and paradox, because, in the first place, production for direct use-value, for consumption by the producers themselves, is most completely eliminated under the capitalist system, so that wealth exists only as a social process expressed as the intertwining of production and circulation; and secondly, with the development of the credit system, capitalist production continually strives to overcome the metal barrier, which is simultaneously a material and imaginative barrier of wealth and its movement, but again and again it breaks its back on this barrier.
In the crisis, the demand is made that all bills of exchange, securities and commodities shall be simultaneously convertible into bank money, and all this bank money, in turn, into gold.
