The Currency Theory Reviewed argued that in England extra wealth keeps piling up, and it tends eventually to take the form of money. Wanting money is one thing; the next most urgent wish is to get rid of it again by putting it into something that pays interest or profit, since money as money earns nothing. So unless the outlets for that surplus capital keep expanding steadily and enough to match it, the country is bound to see periodic pile-ups of money looking for investment, bigger or smaller depending on circumstances.
For many years the national debt was the great absorber of England's surplus wealth. Once the debt reached its peak in 1816 and stopped soaking anything up, at least twenty-seven million a year was forced to look for other outlets. On top of that, various loans were being repaid... Undertakings that need a lot of capital, and that from time to time can take up the excess of idle capital, are — at least in this country — absolutely necessary, so as to carry off the periodic build-ups of society's surplus wealth that cannot find room in the usual channels of investment.
The same pamphlet said this about 1845:
Within a very short time, prices have shot up from their lowest point of depression. Three per cent government bonds are trading almost at face value. The gold sitting in the vaults of the Bank of England is greater than any amount ever stored there before. Shares of every kind stand at prices that are almost unheard of in every case, and the rate of interest has fallen so low it is almost nominal. All of this shows that once again a heavy pile-up of idle wealth exists in England right now, and that another bout of speculative excitement is close at hand.
Although importing gold is no sure sign of profit in foreign trade, Hubbard wrote, in the absence of any other explanation it does, on the face of it, represent part of such a profit. Suppose that at a time of steady trade, fair prices, and a money supply that is neither too tight nor too loose, a poor harvest forces an import of corn and an export of five million in gold, corn worth that same five million coming in as the gold goes out. That 'circulation' — meaning here, as will shortly be seen, not the money changing hands day to day but the idle money capital — would shrink by that same amount. People might still be holding just as much cash as before, but merchants' deposits at their banks, banks' balances with their money-brokers, and the reserves banks keep on hand would all fall, and the immediate result of that fall in idle capital would be a rise in the rate of interest — say, from four per cent to six. Since trade is sound, confidence would not be shaken, but credit would be valued more highly.
But if instead prices generally fall, the surplus money flows back to the banks as bigger deposits, the glut of idle capital pushes the rate of interest down to a minimum, and that state of affairs lasts until either higher prices or livelier trade calls the dormant money back into service, or until it gets absorbed by investment in foreign securities or foreign goods.
The extracts that follow are again from the parliamentary report on Commercial Distress, 1847-48. The 1846-47 harvest failure and the famine made a large import of food necessary.
As a result, imports ran far ahead of exports. This meant a heavy drain of money out of the banks, and more people than usual applying to the discount brokers to get their bills discounted; the brokers began scrutinizing those bills much more closely. The easy terms firms had been getting were sharply cut back, and among the weaker houses there were failures. Those who had relied purely on their credit went under. This only deepened the alarm already building; bankers and others found they could no longer count, with the same confidence as before, on turning their bills and other securities into banknotes to meet their obligations, so they cut back their accommodation still further and often refused it outright. In many cases they locked their banknotes away to cover their own obligations, unwilling to part with them at all. Alarm and confusion grew daily, and without Lord John Russell's letter, general bankruptcy would have followed.
Russell's letter suspended the Bank Act. The Charles Turner mentioned above testified:
Some houses had large resources, but they were not liquid. Their whole capital was tied up in estates in Mauritius, or in indigo works, or sugar works. Having taken on obligations of £500,000 to £600,000, they had no ready funds to pay their bills, and in the end it turned out they could only pay their bills by relying on their credit, and only as far as that credit reached.
The Gurney already mentioned:
Right now, in 1848, dealing is limited and there is a great excess of money.
1763. I do not think it was any want of capital that pushed the rate of interest so high; it was the alarm, the difficulty of getting banknotes.
In 1847 England sent at least £9 million in gold abroad to pay for imported food. Of that, £7 1/2 million came out of the Bank of England alone, and the remaining £1 1/2 million from other sources. Here is Morris, the Bank's Governor:
By 23 October 1847, public stocks and canal and railway shares had already lost £114,752,225 in value altogether.
The same Morris, questioned by Lord G. Bentinck:
Were you not aware that all property invested in stocks and produce of every kind was depreciated the same way — that raw cotton, raw silk and unmanufactured wool were sent to the continent at the same knocked-down prices, and that sugar, coffee and tea were sold off at forced sales? — It was unavoidable that the country make a considerable sacrifice to counter the outflow of gold that the huge import of food had caused. — Do you not think it would have been better to draw on the £8,000,000 sitting in the Bank's coffers than to try to get the gold back at such a cost? — No, I do not.
Now for the comment on this heroism. Disraeli examines Mr W. Cotton, a director and former Governor of the Bank of England.
What dividend did the Bank's proprietors get in 1844? — It was seven per cent for the year. — And the dividend for 1847? — Nine per cent. — Does the Bank pay the income tax for its proprietors this year? — It does. — Did it do so in 1844? — It did not. — Then this Bank Act, of 1844, has worked very well for the proprietors... So the result is that since the new Act was passed, the proprietors' dividend has risen from seven per cent to nine per cent, and the income tax, which used to be paid by the proprietors, is now paid by the Bank instead? — That is quite right. [Nos. 4356-61]
On hoarding by the banks during the crisis of 1847, Mr Pease, a country banker, had this to say:
4605. Since the Bank kept having to raise its rate of interest, everyone grew apprehensive; country bankers built up the amount of gold they held and increased their reserves of notes, and many of us who used to keep, say, a few hundred pounds in gold or banknotes suddenly stashed away thousands in our desks and drawers, since there was such uncertainty about discounting and about whether bills would still be accepted in the market — and so a general hoarding set in.
A member of the committee remarked:
4691. Whatever the cause may have been over the last twelve years, he said, the result had on the whole favoured the Jew and the money-dealer more than the productive class generally.
Tooke's testimony shows just how much the money-dealer exploits a time of crisis:
In the hardware trades of Warwickshire and Staffordshire, a great many orders for goods were turned down in 1847, because the rate of interest a manufacturer had to pay to discount his bills would have swallowed up more than his whole profit. [No. 5451]
Here is another parliamentary report already quoted earlier: the Report of the Select Committee on Bank Acts, sent from the Commons to the Lords, 1857 (referred to from now on as B.C., 1857). In it, Mr Norman — a director of the Bank of England and one of the leading lights of the currency principle — is questioned as follows:
3635. "You said you think the rate of interest depends not on the amount of banknotes but on the supply and demand of capital. Will you say what you include under capital, besides notes and coin?" — "I believe the ordinary definition of capital is: goods or services used in production."
3636. "Do you include all goods under the word capital when you speak of the rate of interest?" — "All goods used in production."
3637. "You include all that under the word capital, when you speak of the rate of interest?" — "Yes. Suppose a cotton manufacturer needs cotton for his factory: he will probably get it by taking an advance from his banker, and with the notes he gets that way he goes to Liverpool and buys. What he actually wants is the cotton; he does not want the notes or the gold, except as a means of getting the cotton. Or he wants the means to pay his workers; then again he borrows notes and pays his workers' wages with them; and the workers, in turn, need food and lodging, and money is the means of paying for that."
3638. "But interest is paid for the money?" — "Certainly, in the first instance; but take another case. Suppose he buys the cotton on credit, without going to the bank for an advance; then the difference between the cash price and the credit price at the time it falls due is the measure of the interest. Interest would exist even if there were no money at all."
This self-satisfied nonsense suits a pillar of the currency principle perfectly. First comes the brilliant discovery that banknotes or gold are only a means of buying something, and that nobody borrows them for their own sake. From that he wants us to conclude that the rate of interest is set by the supply and demand of goods — the very thing everyone had always thought only set the market prices of goods. But plenty of different interest rates can sit alongside market prices for goods that never move at all.
Now watch the real trick. Someone objects, correctly, that interest is paid for the money. That objection is right, and it of course includes the question: what has the interest a banker charges - a banker who deals in no goods at all - to do with these goods? And why do manufacturers pay the same rate of interest even when their money goes into completely different markets, markets where the balance between supply and demand for those production goods looks nothing alike? Faced with this, our solemn genius answers that when a manufacturer buys cotton on credit, the gap between the cash price and the price charged for credit until the bill falls due is what measures the interest.
He has it backwards. It is the going rate of interest — the very thing Norman was meant to explain — that sets the size of that gap between the cash price and the credit price, not the other way round. First the cotton has to change hands at its cash price, and the cash price is fixed by the market price, which is itself regulated by the state of demand and supply. Call it £1,000. As far as buying and selling go, that finishes the deal between manufacturer and cotton broker. But a second, separate transaction rides on top of it: one between a lender and a borrower. A value of £1,000 is handed over to the manufacturer in the form of cotton, to be paid back later, say in three months, in money. The interest on that £1,000 for three months, fixed by whatever the market rate of interest happens to be, gets added on top of the cash price as an extra charge. Supply and demand fix the price of the cotton; the rate of interest fixes the price of lending out that £1,000 for three months. And it is exactly this — the fact that the cotton itself has been turned into money capital along the way — that Norman mistakes for proof that interest would still exist even with no money in the picture at all. Yet drop money out of the picture entirely and there could be no general rate of interest at all.
The first thing wrong here is the vulgar idea of capital as "goods used in production." So far as these goods figure as capital, their value as capital — as distinct from their value as goods — shows up in the profit made from using them productively or commercially. And the rate of profit certainly always has something to do with the market price of the goods bought and their supply and demand, but it is also fixed by quite different factors besides. And there is no doubt that the rate of interest generally has its limit in the rate of profit. But Mr Norman is supposed to tell us exactly how that limit is fixed. And it is fixed by the supply and demand of money capital, as distinct from the other forms of capital. One could go on to ask: how is the supply and demand of money capital itself fixed? There is no doubt at all that a quiet connection exists between the supply of material capital and the supply of money capital, and just as little doubt that the industrial capitalists' demand for money capital is fixed by the conditions of actual production. Instead of enlightening us on this, Norman hands us the wisdom that a demand for money capital is not the same as a demand for money as such — and he offers this wisdom only because he, Overstone, and the other currency prophets always have a bad conscience lurking behind them, from wanting to turn the mere means of circulation into capital itself through artificial legislative interference, and so raise the rate of interest.
Now to Lord Overstone, also known as Samuel Jones Loyd. He has to explain why he charges 10 per cent for his 'money' when 'capital', supposedly, is so scarce in the country.
3653. 'The fluctuations in the rate of interest arise from one of two causes: an alteration in the value of capital'
(Splendid! The value of capital, generally speaking, just is the rate of interest! So on this reading, a change in the rate of interest comes from a change in the rate of interest. 'Value of capital' never means anything else, in theory, than that - we have already shown as much. Or else: if Mr Overstone means by value of capital the rate of profit, then our deep thinker has only come back round to saying that the rate of interest is governed by the rate of profit!)
He continues: the second cause is a change in the amount of money in the country. The great swings trace back to changes in the value of capital, as 1847 and 1855-6 show. The smaller swings from the money side are small in reach and duration, frequent - and the more frequent, the more effective for their purpose.
Namely, enriching bankers like Overstone. Our friend Samuel Gurney puts this very naively to the Committee of Lords, C.D., 1848/1857:
At 1324 Gurney says he believes the great fluctuations of the year before advantaged the dealers in money: all fluctuations of business are advantageous to the knowing man. At 1325, asked whether the banker does not end up losing through the impoverishing of his best customers, he answers no - not to any noticeable degree.
Now that's what I call talking.
We will come back later to how the sum of money in the country affects the rate of interest - that question is deferred, not denied. Right now, though, notice another sleight of hand from Overstone. Demand for money capital rose through 1847 - until October there was no worry about a scarcity of money, the 'quantity of money' as he called it above - for reasons that have nothing to do with each other: corn had grown dear, cotton prices were climbing, sugar could not be sold because too much had been produced, railway speculation was crashing, foreign markets were glutted with cotton goods, and the forced exports to India and forced imports from India described above, purely to manufacture bills to trade. Overproduction in industry, underproduction on the land - utterly different causes, all pushing up demand for money capital, meaning for credit and for money itself. That rising demand had its roots in the production process itself. Whatever the cause, though, it was this demand for money capital that pushed up the rate of interest, the value of money capital.
Say Overstone only means that the value of money capital rose because it rose - that is a bare tautology. Say instead he means that a rising rate of profit caused the rising rate of interest - that turns out false at once: demand for money capital, and so its 'value', can go up even while profit is going down, the moment the relative supply of money capital shrinks. What Overstone wants to establish is that the 1847 crisis and its high interest rate had nothing to do with the quantity of money in the country - that is, with the very Bank Act of 1844 he had inspired himself. Though in truth it did have something to do with it, in so far as fear that the Bank's reserve - a reserve of Overstone's own creating - would run dry added a genuine money panic on top of the 1847-8 crisis. But that is not the question here.
What existed was a real shortage of money capital, brought on by operations far too large for the resources behind them, and brought to a head when the reproduction process was disrupted: a bad harvest, overinvestment in railways, overproduction above all in cotton goods, swindling trade with India and China, speculation, over-importing of sugar, and so on. Buyers who had paid 120 shillings a quarter for corn, once the price fell to 60 shillings, were missing exactly the 60 shillings they had overpaid, and the credit they had borrowed against the corn at that price. No shortage of banknotes stopped them converting their corn to cash at the old price of 120 shillings. The same held for those who had over-imported sugar that then became almost unsaleable, and for the gentlemen who had sunk their circulating capital into railways and counted on credit to replace it in their 'legitimate' trade. Overstone dresses all this up as nothing more than 'a moral sense of the enhanced value of his money'.
But this rise in the value of money capital was matched, on the other side, by an exactly corresponding fall in the money value of real capital - commodity capital and productive capital. Capital's value rose in one form precisely because it fell in the other. Overstone tries to identify these two values of two different kinds of capital in a single value of capital as such, and he does it by setting both of them against a lack of circulating medium, of ready money. But the same amount of money capital can be lent with very different masses of circulating medium.
Look now at his own example, the year 1847. Follow the official Bank rate as it moved through the months: it opened January at 3 to 3 1/2 per cent, climbed to 4 to 4 1/2 per cent in February, held mostly at 4 per cent through March, then jumped in the April panic to 4 up to 7 1/2 per cent. May brought 5 to 5 1/2 per cent, June stayed at 5 per cent throughout, July held at 5 per cent, August moved between 5 and 5 1/2 per cent, and September sat at 5 per cent with small swings up to 5 1/4, 5 1/2 and 6 per cent. October ranged across 5, 5 1/2 and 7 per cent, November rose to 7 up to 10 per cent, and December eased back down from 7 to 5 per cent.
Here, interest rose because profits were falling and the money values of commodities were collapsing enormously. So when Overstone says the rate of interest rose in 1847 because the value of capital rose, the only sense 'value of capital' can carry here is the value of money capital - and that is nothing but the rate of interest itself, nothing more. Only later does the trick show, when he swaps in the rate of profit as what 'value of capital' really means.
As for the high rate of interest paid in 1856, Overstone in fact did not know that it was in part a symptom that the sort of credit-jobbers were coming out on top who pay interest not out of profit but out of other people's capital; only a few months before the crisis of 1857 he was maintaining that 'business is perfectly sound'.
Overstone goes on to testify:
3722: Overstone calls it quite wrong to think a rise in the interest rate destroys the profits of trade. First, such a rise rarely lasts long. Second, when it does last long and is large, it really is a rise in the value of capital — and why does that value rise? Because the rate of profit has gone up.
So here, at last, we learn what "the value of capital" means. But the rate of profit can stay high for a long time even while profit of enterprise falls and the rate of interest rises — so that interest swallows most of the profit.
3724: Overstone says the rise in the rate of interest followed from the huge expansion of the country's trade and the sharp rise in the rate of profit, and that to complain the higher rate destroys the very two things that caused it is a logical absurdity no one knows what to make of.
That is just as logical as if he had said: the higher rate of profit followed from a rise in commodity prices brought about by speculation, and to complain that the price rise destroys its own cause, namely speculation, is a logical absurdity. Only a usurer in love with a high rate of interest could call it a logical absurdity that a thing might, in the end, destroy its own cause. Rome's greatness was the cause of its conquests, and its conquests destroyed its greatness. Wealth is the cause of luxury, and luxury works to destroy wealth. This artful dodger! Nothing paints the idiocy of today's bourgeois world better than the respect the "logic" of this millionaire, this dung-hill aristocrat, was given throughout all of England.
Still, if a high rate of profit and an expanding business can be causes of a high rate of interest, that does not in the least make a high rate of interest a cause of high profit. And the real question is exactly this: whether this high interest — as the crisis in fact showed — did not persist, or was even driven to its peak, only after the high rate of profit had long since gone the way of all flesh.
3718: Overstone says the rise in the discount rate arises entirely from the increased value of capital. In the Act's thirteen years, trade grew from £45,000,000 to £120,000,000 — consider, he says, the enormous demand for capital that brings, while the natural source, the country's annual savings, has been consumed by war. He is surprised interest is not higher still.
What a wonderful jumble of words from our usurer-logician! Here he is again with his risen value of capital! He seems to imagine that on one side there was this enormous expansion of the reproduction process — that is, an accumulation of real capital — and that on the other side there stood some separate "capital", for which an "enormous demand" then arose, in order to bring off this huge increase in trade!
But wasn't this huge increase in production itself an increase in capital — and if it created demand, didn't it at the same time create the supply too, and with it an increased supply of money capital as well? If the rate of interest rose very high, that was only because the demand for money capital grew even faster than the supply — which, put another way, comes down to this: as industrial production expanded, more and more of it was carried on the basis of the credit system. In other words, the real industrial expansion caused an increased demand for "accommodation", and it is evidently this demand that our banker means by the "enormous demand for capital". It was certainly not the mere expansion of demand for capital that raised the export trade from £45 million to £120 million.
And what, further, does Overstone mean when he says that the country's annual savings, eaten up by the Crimean War, form the natural source that should supply this great demand? First: how, then, did England accumulate between 1792 and 1815, a war of quite a different order from the small Crimean one? Second: if the natural source dried up, from what source did the capital flow? England, as is well known, took no advances from foreign nations. And if there is an artificial source alongside the natural one, that would indeed be a charming method for a nation — to use the natural source in war and the artificial source in business. But if only the old money capital was on hand, could a high rate of interest double its effectiveness? Mr Overstone evidently believes that the country's annual savings — which in this case were supposedly consumed — simply turn themselves into money capital. But if there were no real accumulation, that is, no rise in production and increase in the means of production, what good would an accumulation of debt-claims in money form do for that production?
The rise in the "value of capital" that follows from a high rate of profit — this Overstone lumps together with the rise that follows from an increased demand for money capital. That demand may rise from causes quite independent of the rate of profit. He himself gives as an example that in 1847 it rose because of a fall in the value of real capital. Depending on what suits him, he relates the value of capital to real capital, or to money capital.
Our banking lord's dishonesty, together with the narrow banker's outlook he drives home like a lesson, shows itself again in what follows:
'3728. You said that, in your view, the rate of discount makes no real difference to the merchant. Would you be so good as to say what you take the ordinary rate of profit to be?'
Overstone declares it 'impossible' to answer this.
'3729. Suppose the average rate of profit is seven to ten per cent. Then a change in the rate of discount from two per cent to seven or eight per cent must materially affect the rate of profit, must it not?'
(The question itself lumps together the rate of profit of enterprise and the rate of profit, and misses that the rate of profit is the common source both interest and profit of enterprise are drawn from. The rate of interest can leave the rate of profit untouched — but not the profit of enterprise. Overstone's answer:)
'In the first place, businessmen will not pay a discount rate that eats seriously into their profit — they would rather shut down their business.'
(Certainly - if the businessmen can, without ruining themselves. While their profit is high, they pay the discount because they choose to; once it is low, they pay it because they have no choice.)
'What does discounting mean? Why does someone discount a bill? ... Because he wants to get command of a larger capital.' (Hold on! Because he wants to bring forward the return, in money, of capital he has tied up, and avoid his business grinding to a halt. Because he has payments falling due that he must cover. He wants more capital only when business is going well, or when he is speculating with someone else's capital even while business is bad. Discounting is by no means simply a way of expanding the business.)
'And why does he want command of a larger capital? Because he wants to put that capital to use. And why does he want to use it? Because it is profitable for him to do so — though it would not be profitable if the discount swallowed up his profit.'
This self-satisfied logician assumes that bills are discounted only to expand a business, and that a business is expanded because it is profitable to do so. The first assumption is false.
The ordinary businessman discounts a bill to bring forward the money form of his own capital and so keep his production and sales moving — not to expand his business or raise extra capital, but to balance the credit he gives out against the credit he takes in. And if he does want to expand his business on credit, discounting bills will do him little good, since that only converts money capital he already holds from one form into another; he would rather take out a fixed loan for a longer term.
The credit swindler, though, is different: he gets his accommodation bills discounted precisely in order to expand his business, to cover one rotten deal with another — not to make a profit, but to get his hands on someone else's capital.
Having identified discounting with borrowing extra capital in this way — rather than with converting bills that represent capital into cash — Overstone retreats the moment the screws are put to him.
'3730. Question: Once merchants are committed to a business, must they not carry on their operations for a time regardless of a temporary rise in the rate of discount?' — Overstone: 'There's no doubt that in any single transaction, if someone can get command of capital at a lower rate of interest rather than a higher one, then — taking that narrow view of the matter — it suits him.'
It is anything but a narrow view, though, when Overstone suddenly means by 'capital' nothing but his own banking capital, and so treats the man who discounts a bill with him as a man without capital — because that man's capital exists in the form of goods, or because the money form of his capital is a bill, which Overstone then converts into another money form.
'3732. With reference to the Bank Act of 1844, can you say roughly what relation the rate of interest bore to the Bank's gold reserve — is it true that when the Bank held £9 million or £10 million in gold the rate of interest was six or seven per cent, and when it held £16 million the rate stood at about three to four per cent?'
(The questioner is trying to force him to explain the rate of interest, as it is influenced by the amount of gold in the Bank, in terms of the rate of interest as it is influenced by the value of capital.)
'I don't say that is so ... but if it is, then in my view we would need still stricter measures than those of 1844. For if it were true that the bigger the gold hoard, the lower the rate of interest, then, on that view of the matter, we would have to set to work and increase the gold hoard without limit — and then we would bring interest down to nothing.'
Cayley, the questioner, unmoved by this bad joke, goes on:
'3733. If that were so — suppose £5 million in gold were paid back to the Bank, so that over the next six months the gold hoard came to about £16 million, and suppose the rate of interest then fell to three or four per cent — how could it then be claimed that the fall in the rate of interest came from a great falling-off in business? — I said that the recent large rise in the rate of interest, not the fall in the rate of interest, was closely bound up with the great expansion of business.'
But what Cayley is saying is this: if a rising rate of interest together with a shrinking gold hoard is a sign of expanding business, then a falling rate of interest together with a growing gold hoard must be a sign of contracting business. Overstone has no answer to this.
3736. (Question:) 'I noticed you' (the transcript always has 'your Lordship') 'said that money was the instrument for obtaining capital.'
(This is exactly the perversity of it — treating money as an instrument. It is a form of capital.)
'When the gold hoard' (of the Bank of England) 'shrinks, isn't the real strain, on the contrary, that capitalists can't get money?' — (Overstone:) 'No; it isn't the capitalists, it's the non-capitalists who are trying to get money. And why do they try to get money? ... Because, by means of money, they get command of the capitalist's capital, so as to carry on the business of people who are not capitalists.'
Overstone now states outright that manufacturers and merchants are not capitalists, and that the capitalist's capital is nothing but money capital.
'3737. Are the people who draw bills of exchange, then, not capitalists? — The people who draw bills of exchange may be capitalists, and may not be.'
Now Overstone is stuck.
Overstone is now asked whether merchants' bills of exchange don't represent the goods they have sold or shipped. He denies that these bills represent the value of the goods in quite the way a banknote represents gold. (3740, 3741.) This is more than a little brazen.
'3742. Isn't it the merchant's aim to get money? — No; getting money isn't the aim in drawing the bill; getting money is the aim in discounting the bill.'
Drawing a bill converts goods into a form of credit money, just as discounting the bill converts that credit money into another kind of money — banknotes. At any rate, Overstone now admits that the aim of discounting is to get money. Earlier he had it that discounting was done not to convert capital from one form into another, but to get additional capital.
'3743. What is the great desire of the business world under the pressure of a panic, such as you say occurred in 1825, 1837 and 1839 — do they aim to get possession of capital, or of legal-tender money? — Their aim is to get command of capital, to keep their business going.'
The business world's real aim is to get the means of payment for bills on themselves that are falling due — because credit has dried up — and to avoid having to unload their goods below their proper price. If they themselves have no capital at all, then of course they obtain capital too, along with the means of payment, since they are receiving value without giving an equivalent for it.
The demand for money as such is always just the wish to convert value out of the form of goods or a debt claim into the form of money. Hence, quite apart from crises, the great difference between borrowing capital and discounting, which merely converts money claims from one form into another, or into actual money.
(As the editor, let me step in here for a moment.
For Norman and for Overstone alike, the banker always stands there as someone who 'advances capital', and the client as someone who wants 'capital' from him. Overstone says a man has a bill discounted with him 'because he wants to obtain capital' (3729), and that it's convenient for that man if he 'can get his command over capital at a low rate of interest' (3730). 'Money is the instrument for obtaining capital' (3736), and in a panic the whole business world's great wish is 'to get the command of capital' (3743). Whatever confusion Overstone is in about what capital actually is, one thing comes through clearly: he calls what the banker gives his business customer capital — a capital the customer did not have before, advanced to him, on top of what he already had at his disposal.
The banker has grown so used to acting as the distributor — by lending it out — of the disposable social capital in its money form, that any act of handing out money looks to him like a loan. Every payment he makes appears to him as an advance. Where the money is straightforwardly lent out, that is literally true. Where it goes into discounting a bill, it really is, from his point of view, an advance until the bill falls due. So the idea takes hold in his head that he cannot make a payment that isn't an advance. And not just in the loose sense in which any investment of money aimed at earning interest or profit counts, economically, as an advance the money-owner, in his capacity as a private person, makes to himself in his capacity as an entrepreneur. He means it in the specific sense that the banker hands the client a sum as a loan, and by that amount increases the capital the client has at his disposal.
It's this idea, carried over from the bank counter into political economy, that produced the confused dispute over whether what the banker puts at his business customers' disposal in cash is capital, or merely money, a means of circulation, 'currency'. To settle this question — which is basically simple — we have to take the standpoint of the bank's client. What matters is what he actually requires and what he actually receives.
If the bank grants the business customer a loan simply on his personal credit, with no security put up on his side, the case is clear. He unconditionally receives an advance of a definite value, added to the capital he has already been using. He receives it in money form — so not just money, but money capital.
If instead he receives the advance against a pledge of securities and the like, it is an advance in the sense that money is paid to him on condition of repayment — but not an advance of capital. Because the securities themselves also represent capital, and a larger amount than the advance. So the recipient receives less capital value than he hands over as pledge; for him this is in no way an acquisition of extra capital. He doesn't do this business because he needs capital — he already has that, in his securities — but because he needs money. So what's present here is an advance of money, but not of capital.
If the advance is made against discounting bills, then even the form of an advance disappears. What's present is a plain purchase and sale. The bill passes by endorsement into the bank's ownership, the money into the customer's ownership; there's no question of any repayment on his part. If the customer buys cash with a bill or similar credit instrument, that is no more and no less an advance than if he had bought the cash with some other commodity of his — cotton, iron, corn. And least of all can there be any talk here of an advance of capital. Every purchase and sale between one trader and another is a transfer of capital. But an advance only occurs where the transfer of capital is not reciprocal, but one-sided and for a period of time. So a capital advance through bill discounting can only happen where the bill is an accommodation bill, representing no goods actually sold — and no banker takes such a bill once he recognizes it for what it is. In the ordinary discount business, then, the bank's customer receives no advance at all, neither of capital nor of money — he receives money for goods he has sold.
The cases where the customer asks for and gets capital from the bank are thus quite clearly distinct from those where he merely gets an advance of money, or buys something from the bank. And since Overstone in particular was accustomed to advance his own funds without security only in the rarest of cases — he was my firm's banker in Manchester — it's equally clear that his fine descriptions of the masses of capital that generous bankers advance to manufacturers short of capital are sheer invention.
In chapter 32, incidentally, Marx says essentially the same thing:
Chapter 32 had already made the same point: the demand for means of payment is only a demand to turn what one has into money, so far as merchants and producers can offer good security; and it is a demand for money capital, so far as they cannot, since the advance of means of payment then supplies not just the money form but also the equivalent they lack for making their payments, whatever form that equivalent takes. Chapter 33 adds this: where credit is developed and money is concentrated in the banks, it is the banks that advance it, at least in name. This advance relates only to the money that is in circulation. It is an advance of circulation, not of the capitals that this circulation carries. Mr Chapman, who ought to know, confirms this account of the discount business before the 1857 committee.
"The banker has the bill, the banker has bought the bill." Evidence, question 5139.
We shall, by the way, come back to this subject again in chapter 28. - F. E.)
3744. Asked to describe what he actually means by the word capital, Overstone answers that capital is made up of various goods that keep a business running — there is fixed capital and circulating capital. Ships, docks and wharves are fixed; provisions, clothes and so on are circulating.
3745. "Does a drain of bullion abroad harm England?" "Not if you attach a rational sense to that word."
(Now comes the old Ricardian theory of money.)
"...In the natural course of things, the world's money is shared out among the countries of the world in certain proportions; these proportions are such that, under this distribution of money, trade between any one country and all the others together is a mere exchange of goods for goods. But disturbing influences arise from time to time that affect this distribution, and when they do, part of one country's money flows out to others." — "You are now using the word money. If I understood you rightly before, you called that a loss of capital." "What did I call a loss of capital?" — "The outflow of gold." "No, I did not say that. If you treat gold as capital, then of course it is a loss of capital — it is giving up a certain share of the precious metal that makes up the world's money." — "Did you not say earlier that a change in the discount rate is only a sign of a change in the value of capital?" "I did." — "And that the discount rate generally moves with the Bank of England's gold reserve?" "Yes — but I have already said that the swings in the rate of interest that come from a change in the amount of money" (by which, note, he here means the amount of actual gold) "in a country are very small..."
3750. "So do you mean that there has been a fall in capital, when the discount rate has risen above the usual level for some length of time, even if only temporarily?" "A fall, in one sense of the word. The relation between capital and the demand for it has changed — but perhaps through increased demand, not through a fall in the amount of capital."
(But it was exactly this same capital that a moment ago was money or gold — and a little earlier still, the rise in the rate of interest had been explained by a high rate of profit, coming from the expansion, not the shrinking, of the business or the capital.)
3751. "What capital do you have specifically in mind here?" "That depends entirely on what capital each person needs. It is the capital the nation has at its disposal to carry on its business, and if that business doubles, there must be a large increase in the demand for the capital needed to carry it on."
(This crafty banker first doubles the business, and only afterwards doubles the demand for the capital that is supposed to double it. All he ever sees is his customer, asking Mr Loyd for more capital to double his business.)
"Capital is like any other commodity" (but according to Mr Loyd, capital is nothing but the sum of all commodities) "it varies in price" (so the same commodities change price twice over — once as commodities, and again as capital) "according to supply and demand."
3752. "Changes in the discount rate are generally tied to changes in the amount of gold in the Bank's vaults. Is that the capital you mean?" "No." — "Can you point to a case where a large stock of capital sat in the Bank of England alongside a high discount rate?" "The Bank of England is not a place where capital is stored, but where money is stored." — "You said the rate of interest depends on the amount of capital — will you say what capital you mean, and whether you can give an example where a large stock of gold lay in the Bank while the rate of interest was also high?" "It is very likely" (aha!) "that a build-up of gold in the Bank may coincide with a low rate of interest, because a period of reduced demand for capital" (that is, money capital; the years in question, 1844 and 1845, were years of prosperity) "is naturally a period during which the means, or instrument, by which one commands capital can accumulate." — "So you think there is no connection between the discount rate and the amount of gold in the Bank's vaults?" "There may be a connection, but not a connection of principle" (yet his own Bank Act of 1844 makes it precisely a principle of the Bank of England to set the rate of interest by the amount of gold it holds) "they may simply coincide in time." — "Do you mean to say, then, that the difficulty merchants here face, in a tight-money period, because of a high discount rate, is a difficulty in getting capital, and not in getting money?" "You are putting together two things I would not put together in that way — the difficulty is in getting capital, and it is also in getting money... The difficulty of getting money and the difficulty of getting capital are the same difficulty, seen at two different stages of the same process."
Here the fish is caught again. The first difficulty is discounting a bill, or getting an advance against goods put up as security. That is the difficulty of turning capital, or a commercial token standing for capital, into money — and this difficulty shows up, among other things, in a high rate of interest. But once the money has been received, where does the second difficulty lie? If it is only a matter of paying, does anyone ever have trouble getting rid of money? And if it is a matter of buying, has anyone ever had trouble buying in a time of crisis? And even supposing this were about the particular case of dear corn, cotton, and so on, the difficulty could only show up in the price of the goods, not in the value of money capital, that is, the rate of interest — and that difficulty is already overcome, since our man now has the money to buy with.
3760. Asked whether a higher discount rate is not an added difficulty in getting money, Overstone says it is — but what matters is not possessing the money; it is only the form (and this form puts profit into the banker's pocket) in which the added difficulty of getting capital presents itself among the complicated relations of a civilized state.
3763. (Overstone's answer:) "The banker is the middleman who takes in deposits on one side, and on the other puts those deposits to use, entrusting them, in the form of capital, into the hands of persons who..."
Here at last we have what Lord Overstone means by capital: the banker turns money into capital by "entrusting" it — or, less politely, by lending it out at interest.
Having just said that a change in the discount rate has no essential connection with a change in the amount of the Bank's gold reserve or the amount of money in existence, but at most a connection of simple coincidence, Lord Overstone now repeats himself:
Question 3805: 'When a drain reduces the amount of money in the country, its value rises, and the Bank of England has to adjust itself to that change in the value of money.'
(That means its value as capital — in other words, the rate of interest — since money's value as money, measured against commodities, stays the same.)
'— which is what people mean, in the technical phrase, by raising the rate of interest.'
Question 3819: 'I never confuse the two.'
Meaning money and capital — and the reason he never confuses them is simply that he never tells them apart in the first place.
Question 3834: 'The very large sum that had to be paid out' — for corn in 1847 — 'for the country's necessary food supply, and which was, in fact, capital.'
Question 3841: 'The swings in the rate of discount are, without doubt, very closely tied to the state of the reserve' — the Bank of England's reserve — 'because the state of the reserve shows whether the amount of money in the country is going up or down; and as the money in the country goes up or down, its value falls or rises, and the Bank's discount rate follows suit.'
Here, then, he admits exactly what he had flatly denied under question 3755.
Question 3842: 'There is a close connection between the two.'
Meaning between the amount of gold in the issue department and the reserve of notes in the banking department. Here he explains the change in the interest rate by a change in the quantity of money. But what he says here is false. The reserve can shrink simply because the money circulating in the country grows — that happens when the public takes up more notes while the gold stock does not fall. But then the rate of interest rises, because the Bank of England's own banking capital is capped by the Act of 1844. That is exactly what he cannot mention, since under that Act the Bank's two departments have nothing to do with one another.
Under question 3859, Overstone testifies to a rule of his own: a high rate of profit will always create a great demand for capital, and a great demand for capital will raise its value.
So here, at last, is the connection between a high rate of profit and demand for capital, exactly as Overstone pictures it. Take 1844–5: the cotton industry had a high rate of profit, because raw cotton was cheap, and stayed cheap, even with a strong demand for cotton goods. The value of capital — and, going by something he said earlier, Overstone means by capital whatever anyone needs for his business — here, the value of the raw cotton, was not raised for the manufacturer. Now, the high rate of profit may have led some cotton manufacturers to borrow money to expand their business. That raised their demand for money capital, and for nothing else.
Question 3889: 'Gold may or may not be money, just as paper may or may not be a bank-note.'
Question 3896: 'Am I to understand you rightly, then, as giving up the position you took in 1840 — that the fluctuations in the notes put out by the Bank of England ought to follow the fluctuations in the amount of the gold stock? — I give it up to this extent: that, with what we now know, the notes sitting in the Bank of England's own banking reserve have to be added to the notes in circulation.'
That takes the prize. The arbitrary rule that the Bank prints as many paper notes as it holds gold, plus £14 million more, naturally means its note issue rises and falls with the gold stock. But since, on 'what we now know', it turns out that the mass of notes the Bank can produce on this basis — and which the issue department hands over to the banking department — that this circulation between the Bank's two departments, which rises and falls with the gold stock, does not decide the fluctuations in the circulation of bank-notes outside the walls of the Bank of England, the real circulation, the one outside, now becomes a matter of indifference for how the Bank manages itself, and it is the circulation between the Bank's two departments, whose gap from the real circulation the reserve reveals, that alone decides. For the outside world it matters only in that the reserve shows how close the Bank is coming to the legal maximum on its note issue, and how much its customers can still get out of the banking department.
Here is a brilliant example of Overstone's bad faith:
Question 4243 asks whether the amount of capital, in his view, swings from month to month enough to change its value the way the swings in the discount rate have shown in recent years. Overstone allows that the relation between the demand and supply of capital can certainly fluctuate, even over short periods, and adds that if France announced tomorrow that she wanted to raise a very large loan, that would without doubt at once cause a great change in the value of money — that is to say, on his own identification, in the value of capital, in this country.
Question 4245: 'If France announces that she suddenly needs goods worth thirty million for some purpose, there will be a great demand for capital — to use the more scientific and simpler term.'
Question 4246: 'The capital that France would want to buy with her loan is one thing; the money she buys it with is another — is it the money that changes in value, or not? — We are back at the old question again, and I think it is better suited to a scholar's study than to this committee room.'
And with that he retreats — but not into anyone's study.
The Currency Theory Reviewed argued that in England extra wealth keeps piling up, and it tends eventually to take the form of money. Wanting money is one thing; the next most urgent wish is to get rid of it again by putting it into something that pays interest or profit, since money as money earns nothing. So unless the outlets for that surplus capital keep expanding steadily and enough to match it, the country is bound to see periodic pile-ups of money looking for investment, bigger or smaller depending on circumstances.
For many years the national debt was the great absorber of England's surplus wealth. Once the debt reached its peak in 1816 and stopped soaking anything up, at least twenty-seven million a year was forced to look for other outlets. On top of that, various loans were being repaid... Undertakings that need a lot of capital, and that from time to time can take up the excess of idle capital, are — at least in this country — absolutely necessary, so as to carry off the periodic build-ups of society's surplus wealth that cannot find room in the usual channels of investment.
The same pamphlet said this about 1845:
Within a very short time, prices have shot up from their lowest point of depression. Three per cent government bonds are trading almost at face value. The gold sitting in the vaults of the Bank of England is greater than any amount ever stored there before. Shares of every kind stand at prices that are almost unheard of in every case, and the rate of interest has fallen so low it is almost nominal. All of this shows that once again a heavy pile-up of idle wealth exists in England right now, and that another bout of speculative excitement is close at hand.
Although importing gold is no sure sign of profit in foreign trade, Hubbard wrote, in the absence of any other explanation it does, on the face of it, represent part of such a profit. Suppose that at a time of steady trade, fair prices, and a money supply that is neither too tight nor too loose, a poor harvest forces an import of corn and an export of five million in gold, corn worth that same five million coming in as the gold goes out. That 'circulation' — meaning here, as will shortly be seen, not the money changing hands day to day but the idle money capital — would shrink by that same amount. People might still be holding just as much cash as before, but merchants' deposits at their banks, banks' balances with their money-brokers, and the reserves banks keep on hand would all fall, and the immediate result of that fall in idle capital would be a rise in the rate of interest — say, from four per cent to six. Since trade is sound, confidence would not be shaken, but credit would be valued more highly.
But if instead prices generally fall, the surplus money flows back to the banks as bigger deposits, the glut of idle capital pushes the rate of interest down to a minimum, and that state of affairs lasts until either higher prices or livelier trade calls the dormant money back into service, or until it gets absorbed by investment in foreign securities or foreign goods.
The extracts that follow are again from the parliamentary report on Commercial Distress, 1847-48. The 1846-47 harvest failure and the famine made a large import of food necessary.
As a result, imports ran far ahead of exports. This meant a heavy drain of money out of the banks, and more people than usual applying to the discount brokers to get their bills discounted; the brokers began scrutinizing those bills much more closely. The easy terms firms had been getting were sharply cut back, and among the weaker houses there were failures. Those who had relied purely on their credit went under. This only deepened the alarm already building; bankers and others found they could no longer count, with the same confidence as before, on turning their bills and other securities into banknotes to meet their obligations, so they cut back their accommodation still further and often refused it outright. In many cases they locked their banknotes away to cover their own obligations, unwilling to part with them at all. Alarm and confusion grew daily, and without Lord John Russell's letter, general bankruptcy would have followed.
Russell's letter suspended the Bank Act. The Charles Turner mentioned above testified:
Some houses had large resources, but they were not liquid. Their whole capital was tied up in estates in Mauritius, or in indigo works, or sugar works. Having taken on obligations of £500,000 to £600,000, they had no ready funds to pay their bills, and in the end it turned out they could only pay their bills by relying on their credit, and only as far as that credit reached.
The Gurney already mentioned:
Right now, in 1848, dealing is limited and there is a great excess of money.
1763. I do not think it was any want of capital that pushed the rate of interest so high; it was the alarm, the difficulty of getting banknotes.
In 1847 England sent at least £9 million in gold abroad to pay for imported food. Of that, £7 1/2 million came out of the Bank of England alone, and the remaining £1 1/2 million from other sources. Here is Morris, the Bank's Governor:
By 23 October 1847, public stocks and canal and railway shares had already lost £114,752,225 in value altogether.
The same Morris, questioned by Lord G. Bentinck:
Were you not aware that all property invested in stocks and produce of every kind was depreciated the same way — that raw cotton, raw silk and unmanufactured wool were sent to the continent at the same knocked-down prices, and that sugar, coffee and tea were sold off at forced sales? — It was unavoidable that the country make a considerable sacrifice to counter the outflow of gold that the huge import of food had caused. — Do you not think it would have been better to draw on the £8,000,000 sitting in the Bank's coffers than to try to get the gold back at such a cost? — No, I do not.
Now for the comment on this heroism. Disraeli examines Mr W. Cotton, a director and former Governor of the Bank of England.
What dividend did the Bank's proprietors get in 1844? — It was seven per cent for the year. — And the dividend for 1847? — Nine per cent. — Does the Bank pay the income tax for its proprietors this year? — It does. — Did it do so in 1844? — It did not. — Then this Bank Act, of 1844, has worked very well for the proprietors... So the result is that since the new Act was passed, the proprietors' dividend has risen from seven per cent to nine per cent, and the income tax, which used to be paid by the proprietors, is now paid by the Bank instead? — That is quite right. [Nos. 4356-61]
On hoarding by the banks during the crisis of 1847, Mr Pease, a country banker, had this to say:
4605. Since the Bank kept having to raise its rate of interest, everyone grew apprehensive; country bankers built up the amount of gold they held and increased their reserves of notes, and many of us who used to keep, say, a few hundred pounds in gold or banknotes suddenly stashed away thousands in our desks and drawers, since there was such uncertainty about discounting and about whether bills would still be accepted in the market — and so a general hoarding set in.
A member of the committee remarked:
4691. Whatever the cause may have been over the last twelve years, he said, the result had on the whole favoured the Jew and the money-dealer more than the productive class generally.
Tooke's testimony shows just how much the money-dealer exploits a time of crisis:
In the hardware trades of Warwickshire and Staffordshire, a great many orders for goods were turned down in 1847, because the rate of interest a manufacturer had to pay to discount his bills would have swallowed up more than his whole profit. [No. 5451]
Here is another parliamentary report already quoted earlier: the Report of the Select Committee on Bank Acts, sent from the Commons to the Lords, 1857 (referred to from now on as B.C., 1857). In it, Mr Norman — a director of the Bank of England and one of the leading lights of the currency principle — is questioned as follows:
3635. "You said you think the rate of interest depends not on the amount of banknotes but on the supply and demand of capital. Will you say what you include under capital, besides notes and coin?" — "I believe the ordinary definition of capital is: goods or services used in production."
3636. "Do you include all goods under the word capital when you speak of the rate of interest?" — "All goods used in production."
3637. "You include all that under the word capital, when you speak of the rate of interest?" — "Yes. Suppose a cotton manufacturer needs cotton for his factory: he will probably get it by taking an advance from his banker, and with the notes he gets that way he goes to Liverpool and buys. What he actually wants is the cotton; he does not want the notes or the gold, except as a means of getting the cotton. Or he wants the means to pay his workers; then again he borrows notes and pays his workers' wages with them; and the workers, in turn, need food and lodging, and money is the means of paying for that."
3638. "But interest is paid for the money?" — "Certainly, in the first instance; but take another case. Suppose he buys the cotton on credit, without going to the bank for an advance; then the difference between the cash price and the credit price at the time it falls due is the measure of the interest. Interest would exist even if there were no money at all."
This self-satisfied nonsense suits a pillar of the currency principle perfectly. First comes the brilliant discovery that banknotes or gold are only a means of buying something, and that nobody borrows them for their own sake. From that he wants us to conclude that the rate of interest is set by the supply and demand of goods — the very thing everyone had always thought only set the market prices of goods. But plenty of different interest rates can sit alongside market prices for goods that never move at all.
Now watch the real trick. Someone objects, correctly, that interest is paid for the money. That objection is right, and it of course includes the question: what has the interest a banker charges - a banker who deals in no goods at all - to do with these goods? And why do manufacturers pay the same rate of interest even when their money goes into completely different markets, markets where the balance between supply and demand for those production goods looks nothing alike? Faced with this, our solemn genius answers that when a manufacturer buys cotton on credit, the gap between the cash price and the price charged for credit until the bill falls due is what measures the interest.
He has it backwards. It is the going rate of interest — the very thing Norman was meant to explain — that sets the size of that gap between the cash price and the credit price, not the other way round. First the cotton has to change hands at its cash price, and the cash price is fixed by the market price, which is itself regulated by the state of demand and supply. Call it £1,000. As far as buying and selling go, that finishes the deal between manufacturer and cotton broker. But a second, separate transaction rides on top of it: one between a lender and a borrower. A value of £1,000 is handed over to the manufacturer in the form of cotton, to be paid back later, say in three months, in money. The interest on that £1,000 for three months, fixed by whatever the market rate of interest happens to be, gets added on top of the cash price as an extra charge. Supply and demand fix the price of the cotton; the rate of interest fixes the price of lending out that £1,000 for three months. And it is exactly this — the fact that the cotton itself has been turned into money capital along the way — that Norman mistakes for proof that interest would still exist even with no money in the picture at all. Yet drop money out of the picture entirely and there could be no general rate of interest at all.
The first thing wrong here is the vulgar idea of capital as "goods used in production." So far as these goods figure as capital, their value as capital — as distinct from their value as goods — shows up in the profit made from using them productively or commercially. And the rate of profit certainly always has something to do with the market price of the goods bought and their supply and demand, but it is also fixed by quite different factors besides. And there is no doubt that the rate of interest generally has its limit in the rate of profit. But Mr Norman is supposed to tell us exactly how that limit is fixed. And it is fixed by the supply and demand of money capital, as distinct from the other forms of capital. One could go on to ask: how is the supply and demand of money capital itself fixed? There is no doubt at all that a quiet connection exists between the supply of material capital and the supply of money capital, and just as little doubt that the industrial capitalists' demand for money capital is fixed by the conditions of actual production. Instead of enlightening us on this, Norman hands us the wisdom that a demand for money capital is not the same as a demand for money as such — and he offers this wisdom only because he, Overstone, and the other currency prophets always have a bad conscience lurking behind them, from wanting to turn the mere means of circulation into capital itself through artificial legislative interference, and so raise the rate of interest.
Now to Lord Overstone, also known as Samuel Jones Loyd. He has to explain why he charges 10 per cent for his 'money' when 'capital', supposedly, is so scarce in the country.
3653. 'The fluctuations in the rate of interest arise from one of two causes: an alteration in the value of capital'
(Splendid! The value of capital, generally speaking, just is the rate of interest! So on this reading, a change in the rate of interest comes from a change in the rate of interest. 'Value of capital' never means anything else, in theory, than that - we have already shown as much. Or else: if Mr Overstone means by value of capital the rate of profit, then our deep thinker has only come back round to saying that the rate of interest is governed by the rate of profit!)
He continues: the second cause is a change in the amount of money in the country. The great swings trace back to changes in the value of capital, as 1847 and 1855-6 show. The smaller swings from the money side are small in reach and duration, frequent - and the more frequent, the more effective for their purpose.
Namely, enriching bankers like Overstone. Our friend Samuel Gurney puts this very naively to the Committee of Lords, C.D., 1848/1857:
At 1324 Gurney says he believes the great fluctuations of the year before advantaged the dealers in money: all fluctuations of business are advantageous to the knowing man. At 1325, asked whether the banker does not end up losing through the impoverishing of his best customers, he answers no - not to any noticeable degree.
Now that's what I call talking.
We will come back later to how the sum of money in the country affects the rate of interest - that question is deferred, not denied. Right now, though, notice another sleight of hand from Overstone. Demand for money capital rose through 1847 - until October there was no worry about a scarcity of money, the 'quantity of money' as he called it above - for reasons that have nothing to do with each other: corn had grown dear, cotton prices were climbing, sugar could not be sold because too much had been produced, railway speculation was crashing, foreign markets were glutted with cotton goods, and the forced exports to India and forced imports from India described above, purely to manufacture bills to trade. Overproduction in industry, underproduction on the land - utterly different causes, all pushing up demand for money capital, meaning for credit and for money itself. That rising demand had its roots in the production process itself. Whatever the cause, though, it was this demand for money capital that pushed up the rate of interest, the value of money capital.
Say Overstone only means that the value of money capital rose because it rose - that is a bare tautology. Say instead he means that a rising rate of profit caused the rising rate of interest - that turns out false at once: demand for money capital, and so its 'value', can go up even while profit is going down, the moment the relative supply of money capital shrinks. What Overstone wants to establish is that the 1847 crisis and its high interest rate had nothing to do with the quantity of money in the country - that is, with the very Bank Act of 1844 he had inspired himself. Though in truth it did have something to do with it, in so far as fear that the Bank's reserve - a reserve of Overstone's own creating - would run dry added a genuine money panic on top of the 1847-8 crisis. But that is not the question here.
What existed was a real shortage of money capital, brought on by operations far too large for the resources behind them, and brought to a head when the reproduction process was disrupted: a bad harvest, overinvestment in railways, overproduction above all in cotton goods, swindling trade with India and China, speculation, over-importing of sugar, and so on. Buyers who had paid 120 shillings a quarter for corn, once the price fell to 60 shillings, were missing exactly the 60 shillings they had overpaid, and the credit they had borrowed against the corn at that price. No shortage of banknotes stopped them converting their corn to cash at the old price of 120 shillings. The same held for those who had over-imported sugar that then became almost unsaleable, and for the gentlemen who had sunk their circulating capital into railways and counted on credit to replace it in their 'legitimate' trade. Overstone dresses all this up as nothing more than 'a moral sense of the enhanced value of his money'.
But this rise in the value of money capital was matched, on the other side, by an exactly corresponding fall in the money value of real capital - commodity capital and productive capital. Capital's value rose in one form precisely because it fell in the other. Overstone tries to identify these two values of two different kinds of capital in a single value of capital as such, and he does it by setting both of them against a lack of circulating medium, of ready money. But the same amount of money capital can be lent with very different masses of circulating medium.
Look now at his own example, the year 1847. Follow the official Bank rate as it moved through the months: it opened January at 3 to 3 1/2 per cent, climbed to 4 to 4 1/2 per cent in February, held mostly at 4 per cent through March, then jumped in the April panic to 4 up to 7 1/2 per cent. May brought 5 to 5 1/2 per cent, June stayed at 5 per cent throughout, July held at 5 per cent, August moved between 5 and 5 1/2 per cent, and September sat at 5 per cent with small swings up to 5 1/4, 5 1/2 and 6 per cent. October ranged across 5, 5 1/2 and 7 per cent, November rose to 7 up to 10 per cent, and December eased back down from 7 to 5 per cent.
Here, interest rose because profits were falling and the money values of commodities were collapsing enormously. So when Overstone says the rate of interest rose in 1847 because the value of capital rose, the only sense 'value of capital' can carry here is the value of money capital - and that is nothing but the rate of interest itself, nothing more. Only later does the trick show, when he swaps in the rate of profit as what 'value of capital' really means.
As for the high rate of interest paid in 1856, Overstone in fact did not know that it was in part a symptom that the sort of credit-jobbers were coming out on top who pay interest not out of profit but out of other people's capital; only a few months before the crisis of 1857 he was maintaining that 'business is perfectly sound'.
Overstone goes on to testify:
3722: Overstone calls it quite wrong to think a rise in the interest rate destroys the profits of trade. First, such a rise rarely lasts long. Second, when it does last long and is large, it really is a rise in the value of capital — and why does that value rise? Because the rate of profit has gone up.
So here, at last, we learn what "the value of capital" means. But the rate of profit can stay high for a long time even while profit of enterprise falls and the rate of interest rises — so that interest swallows most of the profit.
3724: Overstone says the rise in the rate of interest followed from the huge expansion of the country's trade and the sharp rise in the rate of profit, and that to complain the higher rate destroys the very two things that caused it is a logical absurdity no one knows what to make of.
That is just as logical as if he had said: the higher rate of profit followed from a rise in commodity prices brought about by speculation, and to complain that the price rise destroys its own cause, namely speculation, is a logical absurdity. Only a usurer in love with a high rate of interest could call it a logical absurdity that a thing might, in the end, destroy its own cause. Rome's greatness was the cause of its conquests, and its conquests destroyed its greatness. Wealth is the cause of luxury, and luxury works to destroy wealth. This artful dodger! Nothing paints the idiocy of today's bourgeois world better than the respect the "logic" of this millionaire, this dung-hill aristocrat, was given throughout all of England.
Still, if a high rate of profit and an expanding business can be causes of a high rate of interest, that does not in the least make a high rate of interest a cause of high profit. And the real question is exactly this: whether this high interest — as the crisis in fact showed — did not persist, or was even driven to its peak, only after the high rate of profit had long since gone the way of all flesh.
3718: Overstone says the rise in the discount rate arises entirely from the increased value of capital. In the Act's thirteen years, trade grew from £45,000,000 to £120,000,000 — consider, he says, the enormous demand for capital that brings, while the natural source, the country's annual savings, has been consumed by war. He is surprised interest is not higher still.
What a wonderful jumble of words from our usurer-logician! Here he is again with his risen value of capital! He seems to imagine that on one side there was this enormous expansion of the reproduction process — that is, an accumulation of real capital — and that on the other side there stood some separate "capital", for which an "enormous demand" then arose, in order to bring off this huge increase in trade!
But wasn't this huge increase in production itself an increase in capital — and if it created demand, didn't it at the same time create the supply too, and with it an increased supply of money capital as well? If the rate of interest rose very high, that was only because the demand for money capital grew even faster than the supply — which, put another way, comes down to this: as industrial production expanded, more and more of it was carried on the basis of the credit system. In other words, the real industrial expansion caused an increased demand for "accommodation", and it is evidently this demand that our banker means by the "enormous demand for capital". It was certainly not the mere expansion of demand for capital that raised the export trade from £45 million to £120 million.
And what, further, does Overstone mean when he says that the country's annual savings, eaten up by the Crimean War, form the natural source that should supply this great demand? First: how, then, did England accumulate between 1792 and 1815, a war of quite a different order from the small Crimean one? Second: if the natural source dried up, from what source did the capital flow? England, as is well known, took no advances from foreign nations. And if there is an artificial source alongside the natural one, that would indeed be a charming method for a nation — to use the natural source in war and the artificial source in business. But if only the old money capital was on hand, could a high rate of interest double its effectiveness? Mr Overstone evidently believes that the country's annual savings — which in this case were supposedly consumed — simply turn themselves into money capital. But if there were no real accumulation, that is, no rise in production and increase in the means of production, what good would an accumulation of debt-claims in money form do for that production?
The rise in the "value of capital" that follows from a high rate of profit — this Overstone lumps together with the rise that follows from an increased demand for money capital. That demand may rise from causes quite independent of the rate of profit. He himself gives as an example that in 1847 it rose because of a fall in the value of real capital. Depending on what suits him, he relates the value of capital to real capital, or to money capital.
Our banking lord's dishonesty, together with the narrow banker's outlook he drives home like a lesson, shows itself again in what follows:
'3728. You said that, in your view, the rate of discount makes no real difference to the merchant. Would you be so good as to say what you take the ordinary rate of profit to be?'
Overstone declares it 'impossible' to answer this.
'3729. Suppose the average rate of profit is seven to ten per cent. Then a change in the rate of discount from two per cent to seven or eight per cent must materially affect the rate of profit, must it not?'
(The question itself lumps together the rate of profit of enterprise and the rate of profit, and misses that the rate of profit is the common source both interest and profit of enterprise are drawn from. The rate of interest can leave the rate of profit untouched — but not the profit of enterprise. Overstone's answer:)
'In the first place, businessmen will not pay a discount rate that eats seriously into their profit — they would rather shut down their business.'
(Certainly - if the businessmen can, without ruining themselves. While their profit is high, they pay the discount because they choose to; once it is low, they pay it because they have no choice.)
'What does discounting mean? Why does someone discount a bill? ... Because he wants to get command of a larger capital.' (Hold on! Because he wants to bring forward the return, in money, of capital he has tied up, and avoid his business grinding to a halt. Because he has payments falling due that he must cover. He wants more capital only when business is going well, or when he is speculating with someone else's capital even while business is bad. Discounting is by no means simply a way of expanding the business.)
'And why does he want command of a larger capital? Because he wants to put that capital to use. And why does he want to use it? Because it is profitable for him to do so — though it would not be profitable if the discount swallowed up his profit.'
This self-satisfied logician assumes that bills are discounted only to expand a business, and that a business is expanded because it is profitable to do so. The first assumption is false.
The ordinary businessman discounts a bill to bring forward the money form of his own capital and so keep his production and sales moving — not to expand his business or raise extra capital, but to balance the credit he gives out against the credit he takes in. And if he does want to expand his business on credit, discounting bills will do him little good, since that only converts money capital he already holds from one form into another; he would rather take out a fixed loan for a longer term.
The credit swindler, though, is different: he gets his accommodation bills discounted precisely in order to expand his business, to cover one rotten deal with another — not to make a profit, but to get his hands on someone else's capital.
Having identified discounting with borrowing extra capital in this way — rather than with converting bills that represent capital into cash — Overstone retreats the moment the screws are put to him.
'3730. Question: Once merchants are committed to a business, must they not carry on their operations for a time regardless of a temporary rise in the rate of discount?' — Overstone: 'There's no doubt that in any single transaction, if someone can get command of capital at a lower rate of interest rather than a higher one, then — taking that narrow view of the matter — it suits him.'
It is anything but a narrow view, though, when Overstone suddenly means by 'capital' nothing but his own banking capital, and so treats the man who discounts a bill with him as a man without capital — because that man's capital exists in the form of goods, or because the money form of his capital is a bill, which Overstone then converts into another money form.
'3732. With reference to the Bank Act of 1844, can you say roughly what relation the rate of interest bore to the Bank's gold reserve — is it true that when the Bank held £9 million or £10 million in gold the rate of interest was six or seven per cent, and when it held £16 million the rate stood at about three to four per cent?'
(The questioner is trying to force him to explain the rate of interest, as it is influenced by the amount of gold in the Bank, in terms of the rate of interest as it is influenced by the value of capital.)
'I don't say that is so ... but if it is, then in my view we would need still stricter measures than those of 1844. For if it were true that the bigger the gold hoard, the lower the rate of interest, then, on that view of the matter, we would have to set to work and increase the gold hoard without limit — and then we would bring interest down to nothing.'
Cayley, the questioner, unmoved by this bad joke, goes on:
'3733. If that were so — suppose £5 million in gold were paid back to the Bank, so that over the next six months the gold hoard came to about £16 million, and suppose the rate of interest then fell to three or four per cent — how could it then be claimed that the fall in the rate of interest came from a great falling-off in business? — I said that the recent large rise in the rate of interest, not the fall in the rate of interest, was closely bound up with the great expansion of business.'
But what Cayley is saying is this: if a rising rate of interest together with a shrinking gold hoard is a sign of expanding business, then a falling rate of interest together with a growing gold hoard must be a sign of contracting business. Overstone has no answer to this.
3736. (Question:) 'I noticed you' (the transcript always has 'your Lordship') 'said that money was the instrument for obtaining capital.'
(This is exactly the perversity of it — treating money as an instrument. It is a form of capital.)
'When the gold hoard' (of the Bank of England) 'shrinks, isn't the real strain, on the contrary, that capitalists can't get money?' — (Overstone:) 'No; it isn't the capitalists, it's the non-capitalists who are trying to get money. And why do they try to get money? ... Because, by means of money, they get command of the capitalist's capital, so as to carry on the business of people who are not capitalists.'
Overstone now states outright that manufacturers and merchants are not capitalists, and that the capitalist's capital is nothing but money capital.
'3737. Are the people who draw bills of exchange, then, not capitalists? — The people who draw bills of exchange may be capitalists, and may not be.'
Now Overstone is stuck.
Overstone is now asked whether merchants' bills of exchange don't represent the goods they have sold or shipped. He denies that these bills represent the value of the goods in quite the way a banknote represents gold. (3740, 3741.) This is more than a little brazen.
'3742. Isn't it the merchant's aim to get money? — No; getting money isn't the aim in drawing the bill; getting money is the aim in discounting the bill.'
Drawing a bill converts goods into a form of credit money, just as discounting the bill converts that credit money into another kind of money — banknotes. At any rate, Overstone now admits that the aim of discounting is to get money. Earlier he had it that discounting was done not to convert capital from one form into another, but to get additional capital.
'3743. What is the great desire of the business world under the pressure of a panic, such as you say occurred in 1825, 1837 and 1839 — do they aim to get possession of capital, or of legal-tender money? — Their aim is to get command of capital, to keep their business going.'
The business world's real aim is to get the means of payment for bills on themselves that are falling due — because credit has dried up — and to avoid having to unload their goods below their proper price. If they themselves have no capital at all, then of course they obtain capital too, along with the means of payment, since they are receiving value without giving an equivalent for it.
The demand for money as such is always just the wish to convert value out of the form of goods or a debt claim into the form of money. Hence, quite apart from crises, the great difference between borrowing capital and discounting, which merely converts money claims from one form into another, or into actual money.
(As the editor, let me step in here for a moment.
For Norman and for Overstone alike, the banker always stands there as someone who 'advances capital', and the client as someone who wants 'capital' from him. Overstone says a man has a bill discounted with him 'because he wants to obtain capital' (3729), and that it's convenient for that man if he 'can get his command over capital at a low rate of interest' (3730). 'Money is the instrument for obtaining capital' (3736), and in a panic the whole business world's great wish is 'to get the command of capital' (3743). Whatever confusion Overstone is in about what capital actually is, one thing comes through clearly: he calls what the banker gives his business customer capital — a capital the customer did not have before, advanced to him, on top of what he already had at his disposal.
The banker has grown so used to acting as the distributor — by lending it out — of the disposable social capital in its money form, that any act of handing out money looks to him like a loan. Every payment he makes appears to him as an advance. Where the money is straightforwardly lent out, that is literally true. Where it goes into discounting a bill, it really is, from his point of view, an advance until the bill falls due. So the idea takes hold in his head that he cannot make a payment that isn't an advance. And not just in the loose sense in which any investment of money aimed at earning interest or profit counts, economically, as an advance the money-owner, in his capacity as a private person, makes to himself in his capacity as an entrepreneur. He means it in the specific sense that the banker hands the client a sum as a loan, and by that amount increases the capital the client has at his disposal.
It's this idea, carried over from the bank counter into political economy, that produced the confused dispute over whether what the banker puts at his business customers' disposal in cash is capital, or merely money, a means of circulation, 'currency'. To settle this question — which is basically simple — we have to take the standpoint of the bank's client. What matters is what he actually requires and what he actually receives.
If the bank grants the business customer a loan simply on his personal credit, with no security put up on his side, the case is clear. He unconditionally receives an advance of a definite value, added to the capital he has already been using. He receives it in money form — so not just money, but money capital.
If instead he receives the advance against a pledge of securities and the like, it is an advance in the sense that money is paid to him on condition of repayment — but not an advance of capital. Because the securities themselves also represent capital, and a larger amount than the advance. So the recipient receives less capital value than he hands over as pledge; for him this is in no way an acquisition of extra capital. He doesn't do this business because he needs capital — he already has that, in his securities — but because he needs money. So what's present here is an advance of money, but not of capital.
If the advance is made against discounting bills, then even the form of an advance disappears. What's present is a plain purchase and sale. The bill passes by endorsement into the bank's ownership, the money into the customer's ownership; there's no question of any repayment on his part. If the customer buys cash with a bill or similar credit instrument, that is no more and no less an advance than if he had bought the cash with some other commodity of his — cotton, iron, corn. And least of all can there be any talk here of an advance of capital. Every purchase and sale between one trader and another is a transfer of capital. But an advance only occurs where the transfer of capital is not reciprocal, but one-sided and for a period of time. So a capital advance through bill discounting can only happen where the bill is an accommodation bill, representing no goods actually sold — and no banker takes such a bill once he recognizes it for what it is. In the ordinary discount business, then, the bank's customer receives no advance at all, neither of capital nor of money — he receives money for goods he has sold.
The cases where the customer asks for and gets capital from the bank are thus quite clearly distinct from those where he merely gets an advance of money, or buys something from the bank. And since Overstone in particular was accustomed to advance his own funds without security only in the rarest of cases — he was my firm's banker in Manchester — it's equally clear that his fine descriptions of the masses of capital that generous bankers advance to manufacturers short of capital are sheer invention.
In chapter 32, incidentally, Marx says essentially the same thing:
Chapter 32 had already made the same point: the demand for means of payment is only a demand to turn what one has into money, so far as merchants and producers can offer good security; and it is a demand for money capital, so far as they cannot, since the advance of means of payment then supplies not just the money form but also the equivalent they lack for making their payments, whatever form that equivalent takes. Chapter 33 adds this: where credit is developed and money is concentrated in the banks, it is the banks that advance it, at least in name. This advance relates only to the money that is in circulation. It is an advance of circulation, not of the capitals that this circulation carries. Mr Chapman, who ought to know, confirms this account of the discount business before the 1857 committee.
"The banker has the bill, the banker has bought the bill." Evidence, question 5139.
We shall, by the way, come back to this subject again in chapter 28. - F. E.)
3744. Asked to describe what he actually means by the word capital, Overstone answers that capital is made up of various goods that keep a business running — there is fixed capital and circulating capital. Ships, docks and wharves are fixed; provisions, clothes and so on are circulating.
3745. "Does a drain of bullion abroad harm England?" "Not if you attach a rational sense to that word."
(Now comes the old Ricardian theory of money.)
"...In the natural course of things, the world's money is shared out among the countries of the world in certain proportions; these proportions are such that, under this distribution of money, trade between any one country and all the others together is a mere exchange of goods for goods. But disturbing influences arise from time to time that affect this distribution, and when they do, part of one country's money flows out to others." — "You are now using the word money. If I understood you rightly before, you called that a loss of capital." "What did I call a loss of capital?" — "The outflow of gold." "No, I did not say that. If you treat gold as capital, then of course it is a loss of capital — it is giving up a certain share of the precious metal that makes up the world's money." — "Did you not say earlier that a change in the discount rate is only a sign of a change in the value of capital?" "I did." — "And that the discount rate generally moves with the Bank of England's gold reserve?" "Yes — but I have already said that the swings in the rate of interest that come from a change in the amount of money" (by which, note, he here means the amount of actual gold) "in a country are very small..."
3750. "So do you mean that there has been a fall in capital, when the discount rate has risen above the usual level for some length of time, even if only temporarily?" "A fall, in one sense of the word. The relation between capital and the demand for it has changed — but perhaps through increased demand, not through a fall in the amount of capital."
(But it was exactly this same capital that a moment ago was money or gold — and a little earlier still, the rise in the rate of interest had been explained by a high rate of profit, coming from the expansion, not the shrinking, of the business or the capital.)
3751. "What capital do you have specifically in mind here?" "That depends entirely on what capital each person needs. It is the capital the nation has at its disposal to carry on its business, and if that business doubles, there must be a large increase in the demand for the capital needed to carry it on."
(This crafty banker first doubles the business, and only afterwards doubles the demand for the capital that is supposed to double it. All he ever sees is his customer, asking Mr Loyd for more capital to double his business.)
"Capital is like any other commodity" (but according to Mr Loyd, capital is nothing but the sum of all commodities) "it varies in price" (so the same commodities change price twice over — once as commodities, and again as capital) "according to supply and demand."
3752. "Changes in the discount rate are generally tied to changes in the amount of gold in the Bank's vaults. Is that the capital you mean?" "No." — "Can you point to a case where a large stock of capital sat in the Bank of England alongside a high discount rate?" "The Bank of England is not a place where capital is stored, but where money is stored." — "You said the rate of interest depends on the amount of capital — will you say what capital you mean, and whether you can give an example where a large stock of gold lay in the Bank while the rate of interest was also high?" "It is very likely" (aha!) "that a build-up of gold in the Bank may coincide with a low rate of interest, because a period of reduced demand for capital" (that is, money capital; the years in question, 1844 and 1845, were years of prosperity) "is naturally a period during which the means, or instrument, by which one commands capital can accumulate." — "So you think there is no connection between the discount rate and the amount of gold in the Bank's vaults?" "There may be a connection, but not a connection of principle" (yet his own Bank Act of 1844 makes it precisely a principle of the Bank of England to set the rate of interest by the amount of gold it holds) "they may simply coincide in time." — "Do you mean to say, then, that the difficulty merchants here face, in a tight-money period, because of a high discount rate, is a difficulty in getting capital, and not in getting money?" "You are putting together two things I would not put together in that way — the difficulty is in getting capital, and it is also in getting money... The difficulty of getting money and the difficulty of getting capital are the same difficulty, seen at two different stages of the same process."
Here the fish is caught again. The first difficulty is discounting a bill, or getting an advance against goods put up as security. That is the difficulty of turning capital, or a commercial token standing for capital, into money — and this difficulty shows up, among other things, in a high rate of interest. But once the money has been received, where does the second difficulty lie? If it is only a matter of paying, does anyone ever have trouble getting rid of money? And if it is a matter of buying, has anyone ever had trouble buying in a time of crisis? And even supposing this were about the particular case of dear corn, cotton, and so on, the difficulty could only show up in the price of the goods, not in the value of money capital, that is, the rate of interest — and that difficulty is already overcome, since our man now has the money to buy with.
3760. Asked whether a higher discount rate is not an added difficulty in getting money, Overstone says it is — but what matters is not possessing the money; it is only the form (and this form puts profit into the banker's pocket) in which the added difficulty of getting capital presents itself among the complicated relations of a civilized state.
3763. (Overstone's answer:) "The banker is the middleman who takes in deposits on one side, and on the other puts those deposits to use, entrusting them, in the form of capital, into the hands of persons who..."
Here at last we have what Lord Overstone means by capital: the banker turns money into capital by "entrusting" it — or, less politely, by lending it out at interest.
Having just said that a change in the discount rate has no essential connection with a change in the amount of the Bank's gold reserve or the amount of money in existence, but at most a connection of simple coincidence, Lord Overstone now repeats himself:
Question 3805: 'When a drain reduces the amount of money in the country, its value rises, and the Bank of England has to adjust itself to that change in the value of money.'
(That means its value as capital — in other words, the rate of interest — since money's value as money, measured against commodities, stays the same.)
'— which is what people mean, in the technical phrase, by raising the rate of interest.'
Question 3819: 'I never confuse the two.'
Meaning money and capital — and the reason he never confuses them is simply that he never tells them apart in the first place.
Question 3834: 'The very large sum that had to be paid out' — for corn in 1847 — 'for the country's necessary food supply, and which was, in fact, capital.'
Question 3841: 'The swings in the rate of discount are, without doubt, very closely tied to the state of the reserve' — the Bank of England's reserve — 'because the state of the reserve shows whether the amount of money in the country is going up or down; and as the money in the country goes up or down, its value falls or rises, and the Bank's discount rate follows suit.'
Here, then, he admits exactly what he had flatly denied under question 3755.
Question 3842: 'There is a close connection between the two.'
Meaning between the amount of gold in the issue department and the reserve of notes in the banking department. Here he explains the change in the interest rate by a change in the quantity of money. But what he says here is false. The reserve can shrink simply because the money circulating in the country grows — that happens when the public takes up more notes while the gold stock does not fall. But then the rate of interest rises, because the Bank of England's own banking capital is capped by the Act of 1844. That is exactly what he cannot mention, since under that Act the Bank's two departments have nothing to do with one another.
Under question 3859, Overstone testifies to a rule of his own: a high rate of profit will always create a great demand for capital, and a great demand for capital will raise its value.
So here, at last, is the connection between a high rate of profit and demand for capital, exactly as Overstone pictures it. Take 1844–5: the cotton industry had a high rate of profit, because raw cotton was cheap, and stayed cheap, even with a strong demand for cotton goods. The value of capital — and, going by something he said earlier, Overstone means by capital whatever anyone needs for his business — here, the value of the raw cotton, was not raised for the manufacturer. Now, the high rate of profit may have led some cotton manufacturers to borrow money to expand their business. That raised their demand for money capital, and for nothing else.
Question 3889: 'Gold may or may not be money, just as paper may or may not be a bank-note.'
Question 3896: 'Am I to understand you rightly, then, as giving up the position you took in 1840 — that the fluctuations in the notes put out by the Bank of England ought to follow the fluctuations in the amount of the gold stock? — I give it up to this extent: that, with what we now know, the notes sitting in the Bank of England's own banking reserve have to be added to the notes in circulation.'
That takes the prize. The arbitrary rule that the Bank prints as many paper notes as it holds gold, plus £14 million more, naturally means its note issue rises and falls with the gold stock. But since, on 'what we now know', it turns out that the mass of notes the Bank can produce on this basis — and which the issue department hands over to the banking department — that this circulation between the Bank's two departments, which rises and falls with the gold stock, does not decide the fluctuations in the circulation of bank-notes outside the walls of the Bank of England, the real circulation, the one outside, now becomes a matter of indifference for how the Bank manages itself, and it is the circulation between the Bank's two departments, whose gap from the real circulation the reserve reveals, that alone decides. For the outside world it matters only in that the reserve shows how close the Bank is coming to the legal maximum on its note issue, and how much its customers can still get out of the banking department.
Here is a brilliant example of Overstone's bad faith:
Question 4243 asks whether the amount of capital, in his view, swings from month to month enough to change its value the way the swings in the discount rate have shown in recent years. Overstone allows that the relation between the demand and supply of capital can certainly fluctuate, even over short periods, and adds that if France announced tomorrow that she wanted to raise a very large loan, that would without doubt at once cause a great change in the value of money — that is to say, on his own identification, in the value of capital, in this country.
Question 4245: 'If France announces that she suddenly needs goods worth thirty million for some purpose, there will be a great demand for capital — to use the more scientific and simpler term.'
Question 4246: 'The capital that France would want to buy with her loan is one thing; the money she buys it with is another — is it the money that changes in value, or not? — We are back at the old question again, and I think it is better suited to a scholar's study than to this committee room.'
And with that he retreats — but not into anyone's study.