A pamphlet of the day puts it like this — and it is quoted here, not adopted. Credit is the great regulator of how fast circulation moves. That is why a sharp squeeze in the money market usually comes together with a full circulation. (The Currency Theory Reviewed, p. 65.)

The sentence is to be taken in two senses. For one thing, every device for saving means of circulation rests on credit. For another, take a £500 note. A uses it today to pay B for a bill of exchange; B deposits it with his banker the same day; the banker uses it that same day to discount a bill for C; C pays it into his bank, and the bank advances it to the bill-broker, and so on. The speed at which the note circulates here, serving for purchases or payments, is mediated by the speed at which it keeps coming back to someone as a deposit and passing out again to someone else as a loan.

Saving on the means of circulation shows itself at its most developed in the clearing house — the bare exchange of bills that have fallen due, where money works mainly as a means of payment, to settle the balances. But whether these bills exist at all depends on the credit that industrialists and merchants give one another. When that credit shrinks, the number of bills shrinks with it, the long-dated ones above all, and with them what this way of settling can do. And this saving, which consists in pushing money out of the transactions and rests entirely on money's function as a means of payment — which in turn rests on credit — can only take two forms (quite apart from how far the technique of concentrating these payments has developed): the claims people hold on one another, written into bills of exchange or cheques, are squared either by the same banker, who simply writes the claim over from one person's account to another's, or by the different bankers settling among themselves. When £8-£10 million of bills were gathered in the hands of one bill-broker — a firm like Overend, Gurney & Co., say — that was one of the main ways of widening the reach of these settlements in a given place. This kind of saving makes the means of circulation go further, in that a smaller quantity of it is enough merely to square the balance.

How fast the money going round as a means of circulation moves — which is another way of saving it — hangs entirely on the stream of buying and selling, or else on how payments are chained together when they follow one another in money. But credit steps in and raises the velocity of circulation. A single coin may make only five rounds, and lie longer in each hand — as a plain means of circulation, with no credit in between — if A, its first owner, buys from B, B from C, C from D, D from E and E from F, so that it changes hands only through real purchases and sales. But if B deposits with his banker the money A paid him, and the banker hands it on to C in discounting a bill, C buying from D, D depositing it with his banker and that banker lending it to E, who buys from F, then even its speed as a plain means of circulation (as a means of purchase) is mediated by four credit operations. Without those credit operations, the same coin would not have made five purchases one after another in the given time. Because it changed hands with no real purchase and sale behind it — as a deposit, and in a discount — its passage through the series of real sales was speeded up.

It came out earlier that the very same banknote can sit as a deposit with several different bankers. In just the same way, it can sit as several deposits with one and the same banker. He uses the note that A deposited to discount B's bill; B pays C with it; C pays that same note in to that same banker, who hands it out again.

In looking at simple money circulation (Volume 1, Chapter 3, 2) we showed earlier that, once the velocity of circulation and the saving on payments are taken as given, the quantity of money actually circulating is fixed by the prices of commodities and the mass of transactions. The same law holds for the circulation of notes.

Below, for each year, are set down the yearly averages of Bank of England notes in the hands of the public: what was held in £5 and £10 notes, in notes from £20 to £100, and in the larger notes from £200 to £1,000, together with the share of the whole circulation that each of these groups supplies. The amounts are in thousands, with the last three figures struck out.

(B. A. 1858, p. xxvi.)

So the total of banknotes in circulation actually fell between 1844 and 1857, even though trade, as shown by exports and imports, had more than doubled. The smaller notes, of £5 and £10, rose, as the list shows, from £9,263,000 in 1844 to £10,659,000 in 1857 — and this at the very time when the gold circulation was growing so strongly. The larger notes, on the other hand (from £200 to £1,000), fell from £5,856,000 in 1852 to £3,241,000 in 1857. A fall of more than £2 1/2 million. This is explained as follows:

On 8 June 1854 the London private bankers let the joint-stock banks into the clearing house, and soon after that the final clearing was set up in the Bank of England. The daily settling up now happens by transfers on the books — the sums are simply written over on the accounts that the different banks keep at the Bank of England. Once this system was in, the big notes the banks had used to square their accounts with one another became superfluous. (B.A. 1858, p. V.)

How far the use of money in wholesale trade has been cut down can be seen from the table reproduced in Volume 1, Chapter 3. It was handed to the Bank Acts Committee by Morrison, Dillon & Co., one of the biggest London houses of the kind where a small trader can buy in his entire stock of goods of every sort.

W. Newmarch's evidence to the B.A. in 1857, no. 1741, names other things that helped to save means of circulation too: the penny post, the railways, the telegraphs — in short the better means of communication. The result is that England now handles five or six times the business on roughly the same banknote circulation. This, he says, is also essentially thanks to keeping notes above £10 out of circulation. To his mind, this appears to be a natural explanation for the fact that note circulation has risen by roughly 31 per cent in Scotland and Ireland, where £1 notes also circulate (1747). Count the £1 notes in and banknote circulation across the whole United Kingdom is £39 million (1749). Gold in circulation is £70 million (1750). Scotland's note circulation was £3,120,000 in 1834, £3,020,000 in 1844 and £4,050,000 in 1854 (1752).

From this alone it follows that it is by no means up to the note-issuing banks to raise the number of notes in circulation, as long as those notes can be exchanged for money at any time. (Inconvertible paper money is not what is at issue here at all; inconvertible banknotes can only become general means of circulation where they are in fact carried by state credit, as for instance at present in Russia. They then fall under the laws of inconvertible state paper money, which have already been set out — Volume 1, Chapter 3, 2, c: Coin. The Symbol of Value. — F. E.)

How many notes circulate depends on what commerce needs, and any note that is one too many goes straight back to the bank that issued it. Since in England only the Bank of England's notes pass generally as legal tender, the tiny and purely local note circulation of the provincial banks can be left aside here.

Before the B.A. of 1858, the Governor of the Bank of England, Mr Neave, testified as follows:

947. (Question:) Whatever measures they take, the amount of notes in the public's hands stays the same, he says — about £20 million? — In ordinary times, he answers, what the public uses seems to call for about £20 million. At certain fixed moments of the year these rise by another £1 million or £1.5 million. If the public wants more, it can always get them from the Bank of England, as he said. 948. He is asked to account for his statement that during the panic the public would not let them reduce the note issue. In times of panic, he says, the public has, as he believes, full power to help itself to notes; and of course, since the Bank has a liability, the public can draw notes from the Bank on the strength of that liability. 949. So about £20 million of notes appears to be needed at all times? — £20 million of notes in the public's hands, and it varies: £18.5 million, £19 million, £20 million and so on; but taking the average, you can call it £19 million to £20 million.

Thomas Tooke's evidence before the Lords' Committee on Commercial Distress (C.D. 1848/1857), no. 3094:

The Bank has no power to expand the amount of notes in the public's hands of its own will. What it does have the power to do is to reduce the amount in the public's hands — but only by a very violent operation.

J. C. Wright, a banker in Nottingham for thirty years, first sets out at length why it is impossible for the provincial banks ever to keep more notes in circulation than the public needs and wants. About the Bank of England's notes he then says (CD 1848/1857), no. 2844:

Wright knows of no check on the Bank of England — so far as the issue of notes goes — but any excess of circulation, he says, will go into the deposits and so take another form.

In Scotland the same goes. Paper is practically the only thing in circulation there, since Scotland, like Ireland, allows £1 notes as well, and the Scots, so the saying goes, hate gold.

Kennedy, the director of a Scottish bank, declares that the banks cannot so much as reduce their note circulation, and this is his view:

So long as domestic business deals need notes or gold to be carried through, the bankers must supply as much of the means of circulation as those deals require — whether because their depositors demand it, or in some other way ... The Scottish banks can restrict their business, but they can exercise no control over their note issue. (ibid., nos. 3446, 3448.)

In the same way Anderson, the director of the Union Bank of Scotland, says (ibid., no. 3578):

Does the system of mutual exchange of notes (among the Scottish banks) prevent any single bank from over-issuing? — Yes; but we have a more effective means than the exchange of notes (which in fact has nothing whatever to do with it, though it does guarantee that each bank's notes can circulate all over Scotland), and that is the universal practice in Scotland of keeping a bank account. Everyone who has any money at all has an account at a bank and pays in daily all the money he does not immediately need himself, so that at the close of each business day all the money is in the banks, apart from what each man carries in his pocket.

The same goes for Ireland, as the evidence of MacDonnell, Governor of the Bank of Ireland, and of Murray, director of the Provincial Bank of Ireland, shows before the same committee.

The note circulation owes nothing to the will of the Bank of England, and just as little to the state of the gold reserve in the Bank's cellars — and yet that reserve is what secures the convertibility of these notes.

On 18 September 1846 the note circulation of the Bank of England was £20,900,000 and its metal reserve £16,273,000; on 5 April 1847 the circulation was £20,815,000 and the metal reserve £10,246,000. So despite the export of £6 million of precious metal, there was no shrinking of the circulation. (J. G. Kinnear, The Crisis and the Currency, London, 1847, p. 5.)

It goes without saying, however, that all this holds only under the conditions prevailing in England today, and even there only so far as legislation on the ratio between note issue and metal reserve does not command otherwise.

So it is only the needs of business itself that have an influence on how much money is in circulation — notes and gold. The first thing to consider here are the fluctuations that come round again every year, whatever the general state of business may be, so that for twenty years past

Newmarch's words are that the circulation is high in one month, low in another, and in a certain third month it reaches a middle point. (B. A. 1857, no. 1650.)

So every August a few £ million, mostly in gold, pass out of the Bank of England into domestic circulation, to pay the costs of the harvest. Since what is mainly being paid here are wages, banknotes are of less use for this in England. By the end of the year the money has flowed back to the Bank. In Scotland there are almost no sovereigns, only £1 notes; so there the note circulation expands in the corresponding case, and it does so twice a year, in May and November, from £3 million to £4 million; after fourteen days the reflux has begun, and within a month it is almost complete. (Anderson, op. cit. [C. D. 1848/1857], nos. 3595-3600.)

The Bank of England's note circulation also has a momentary swing every quarter, because of the quarterly payment of 'dividends' — that is, the interest on the national debt. Notes are first drawn out of circulation and then thrown back among the public; but they flow back very quickly. Weguelin (B. A. 1857, no. 38) puts the swing this causes in the note circulation at £2 1/2 million. By contrast, Mr Chapman of the notorious firm of Overend, Gurney & Co. puts the amount of the disturbance this causes on the money market far higher.

Chapman's own figure: when you take £6,000,000 or £7,000,000 out of circulation for taxes, in order to pay the dividends, somebody has to be there who makes that amount available in the meantime. (B. A. 1857, no. 5196.)

Far more important, and far more lasting, are the fluctuations in the amount of the circulating medium that go with the different phases of the industrial cycle. Let us hear on this from another associate of that firm, the worthy Quaker Samuel Gurney (C. D. 1848/1857, no. 2645).

At the end of October 1847, Gurney says, there were £20,800,000 of notes in the hands of the public. At that time it was very hard to get hold of banknotes on the money market. That came from the general fear that, with the restriction of the Bank Act of 1844, people would not be able to obtain them. At present (March 1848) the amount of banknotes in the public's hands is £17,700,000, but since there is no commercial alarm at all just now, that is far more than is needed. There is no banker or money dealer in London who does not hold more banknotes than he can use. The amount of banknotes outside the Bank of England's own keeping is a totally inadequate exponent of the active state of the circulation, unless you also take into account the state of the commercial world and the state of credit. The feeling that we have a surplus at the present amount of circulation in the public's hands comes in large degree from our present state of great stagnation. With high prices and excited business, £17,700,000 would give us a feeling of scarcity.

While business is such that the advances made come back in on schedule and credit therefore stands unshaken, what stretches or shrinks the circulation depends simply on what the industrialists and merchants need. At least in England gold plays no part in wholesale trade, and once we leave aside the swings that come with the seasons, the gold circulation can be taken as fairly constant over a long stretch; so the Bank of England's note circulation is a good enough gauge of these changes. In the quiet spell after a crisis, the least is out there. As demand revives, the call for means of circulation grows too, and it climbs further as prosperity climbs; the quantity of means of circulation peaks in the period of over-trading and over-speculation — then the crisis breaks, and overnight the banknotes that were still so plentiful the day before have disappeared from the market, and with them the discounters of bills, those advancing on securities, the buyers of goods. The Bank of England is supposed to help — but its powers too run out before long, and the Bank Act of 1844 forces it to tighten its note circulation at precisely the moment when the whole world is crying out for banknotes, when those who own commodities cannot sell and are nevertheless supposed to pay, and are ready to make any sacrifice if only they can get their hands on banknotes.

In an alarm, says the banker Wright named earlier (op. cit., no. 2930), the country employs double the circulation it does in ordinary times, since bankers and others are storing up the circulating medium.

As soon as the crisis breaks, it is only a question of means of payment. But since each person depends on the next for these means of payment arriving, and nobody knows whether the other will be able to pay on the due day, a real steeplechase sets in for the means of payment that are on the market — that is, for banknotes. Everyone stores up as many of them as he can get, and so the notes disappear from circulation on the very day they are most needed. Samuel Gurney (C. D. 1848/1857, no. 1116) puts the banknotes locked away at the moment of terror in October 1847 at £4-£5 million. — F. E.

Especially interesting in this connection is the examination of Gurney's partner, the Chapman already mentioned, before the 1857 Bank Acts Committee. I give the main content of it here in sequence, although it also takes up some points that we shall look into only later.

Mr Chapman expresses himself as follows.

4963. Chapman has no hesitation in saying that he does not think it a proper state of things for the money market to be in the power of any individual capitalist — and there are such men in London — who can bring about a tremendous scarcity of money and a squeeze when the circulation happens to be very low. That is possible. There is more than one capitalist who can take £1 million or £2 million of notes out of the circulating medium, if he has an object to gain by it.

4965. A big speculator can sell £1 million or £2 million of Consols and so take the money out of the market. Something similar occurred only a short time ago; it “produces an extremely violent squeeze”.

4967. The notes, it is true, then lie unproductive.

But that is nothing, Chapman says, if it brings about his great object. His great object is to knock down the funds, to create a money squeeze; and to do that, he says, lies completely in his power.

An example. One morning there was a great demand for money on the stock exchange; nobody knew the cause. Someone offered to borrow £50,000 from Chapman at 7 per cent. Chapman was astonished — his rate of interest stood much lower — but he took the offer. At once the man returned, taking another £50,000 at 7 1/2 per cent, then £100,000 at 8 per cent, and wanting still more at 8 1/2 per cent. Then even Chapman got frightened. It turned out afterwards that a considerable sum of money had suddenly been withdrawn from the market. But, says Chapman,

Chapman's own words: he did lend a large sum at 8 per cent, he was afraid to go further, he did not know what was coming.

It must never be forgotten that although the public is ostensibly holding a fairly steady £19-£20 million in notes, the portion that really circulates, on the one hand, and the portion lying unemployed in the banks as a reserve, on the other, are constantly and substantially shifting against one another. When the reserve is large and so the actual circulation low, the money market's way of putting it is that the circulation is 'full' — money is plentiful. When the reserve is small and so the actual circulation full, the money market calls it 'low' and says money is scarce, meaning that only a small amount sits there representing unoccupied loan capital. A genuine expansion or contraction of the circulation, one independent of the phases of the industrial cycle — in which, however, the amount the public needs stays the same — comes about only for technical reasons, for example on the dates when taxes fall due or when the interest on the national debt is paid. When taxes are paid, notes and gold flow into the Bank of England beyond the usual measure and in fact contract the circulation, with no regard for the need for it. The opposite when the national debt's dividends are paid out. In the first case, the Bank is where loans are raised, with the aim of getting hold of means of circulation. In the latter case, the rate of interest at the private banks falls, because their reserves momentarily grow. None of this has anything to do with the absolute mass of means of circulation; it concerns only the banking firm that puts those means of circulation into circulation, for which this process presents itself as an alienation of loan capital, and which therefore keeps the profit in its own pocket.

In the one case there is simply a temporary displacement of the circulating medium, which the Bank of England evens out by making short advances at low interest shortly before the quarterly taxes fall due and before the equally quarterly dividends; the extra notes issued in this way first fill the gap that paying the taxes has caused, while their repayment to the Bank immediately afterwards brings back the surplus of notes that paying out the dividends has thrown among the public.

In the other case, a low circulation or a full one is never anything more than the same mass of means of circulation split differently between active circulation and deposits — that is, deposits serving as the instrument of loans.

On the other hand, if an influx of gold to the Bank of England increases the number of notes issued against it, these notes help the discount business outside the Bank and then flow back in the repayment of loans, so that the absolute mass of notes in circulation is only momentarily increased.

If the circulation is full because business is expanding (which is possible even at relatively low prices), the rate of interest can be relatively high, because of the demand for loan capital that follows from rising profits and increased new investment. If it is low, whether because business is contracting or because credit is very easy, the rate of interest can be low even with high prices. (See Hubbard.)

Only in times of squeeze does the absolute quantity of circulation exert a determining influence on the rate of interest. Either the demand for a full circulation there expresses nothing but a demand for means of hoarding — leaving aside the reduced velocity with which the money circulates, and with which the same identical coins are constantly turned into loan capital — and this because of the want of credit, as in 1847, when the suspension of the Bank Act caused no expansion of the circulation, but was enough to bring the hoarded notes back to light and into circulation. Or more means of circulation really can be required under those circumstances, as in 1857, when the circulation really did grow for a time after the suspension of the Bank Act.

Otherwise the absolute mass of circulation does not act on the rate of interest, since — taking the economy and the velocity of circulation as constant — first, it is determined by the prices of commodities and the volume of transactions (where one factor mostly cancels out the effect of the other) and finally by the state of credit, while it in no way determines the latter in return; and second, because commodity prices and interest stand in no necessary connection.

Under the Bank Restriction Act (1797-1820) there was an excess of 'currency', and the rate of interest stayed far higher than it did after cash payments were resumed. It later dropped sharply as the note issue was reined in and exchange rates rose. In 1822, 1823 and 1832 circulation was generally low, and the rate of interest low with it. In 1824, 1825 and 1836, circulation stood high and the interest rate went up. In the summer of 1830 circulation was high while the rate of interest stayed low. Since the gold discoveries, money circulation has expanded all over Europe and the rate of interest has climbed. So the rate of interest does not depend on how much money is circulating.

The clearest place to see the difference between issuing a means of circulation and lending capital is the real process of reproduction. In Volume 2, Part Three we saw how the different components of production exchange with one another.

Take variable capital. In substance it is the workers' means of subsistence, a piece of what they themselves produce. But it is paid out to them in money, a bit at a time. The capitalist has to put that money up in advance, and whether he can pay out the new variable capital next week using the same money he paid out the week before depends very much on how the credit system is organized. The same goes for the acts of exchange between the different components of society's total capital — between means of consumption, say, and the means of producing means of consumption.

The money needed to circulate these things, as we have seen, has to be advanced by one or both of the parties doing the exchanging. It then stays in circulation, but once the exchange is complete it keeps returning to whoever advanced it, since he advanced it over and above the industrial capital he actually has at work. (See Volume 2, Chapter 20.) Once the credit system is developed, so that money is concentrated in the banks' hands, it is the banks that advance it — at least nominally.

What they advance concerns only the money that is in circulation. What is being advanced is circulation, not the capitals that it circulates.

Chapman:

5062. There may be times, Chapman says, when the banknotes in the public's hands amount to a very large sum and still not one is to be had.

Money is on hand even in a panic; but everyone is careful not to turn it into loanable capital, into loanable money; each person holds on to it against payments actually falling due.

5099. Chapman is asked whether the country banks in the rural districts send their unemployed surpluses up to him and other London houses, and answers: yes. 5100. He is asked whether, on the other side, the factory districts of Lancashire and Yorkshire have bills discounted with him for their trade purposes, and answers: yes. 5101. He is asked whether in this way the surplus money of one part of the country is made useful for what another part needs, and answers: quite right.

Chapman says the banks' habit of putting their surplus money capital out for short periods by buying Consols and Treasury bills has fallen off a good deal lately, now that it has become the practice to lend this money at call — that is, repayable on demand, from one day to the next. He himself thinks buying that kind of paper highly unsuitable for his business. So he puts his money into good bills, a portion of which falls due every day, so that he always knows how much ready money he can count on each day. (5101–5105.)

Even the growth of exports presents itself — more or less for every country, but above all for the country that gives credit — as a growing demand on the domestic money market, though that demand is felt as such only in times of squeeze. When exports are growing, long-dated bills are as a rule drawn by manufacturers on the export merchant against consignments of British manufactures. (5126.)

5127. Chapman is asked whether it is not often the case that an understanding exists for these bills to be renewed from time to time. He answers that this is a thing they keep from us; we would not allow a bill of that kind ... it may certainly happen, but he can say nothing about anything of the sort. (The innocent Chapman.) 5129. If a large increase in exports takes place, like last year's of £20 million, does that not by itself lead to a large demand for capital, to discount the bills that represent those exports? — Undoubtedly. 5130. Since England as a rule gives the foreigner credit for all its exports, would that not require a corresponding additional capital to be tied up for as long as it lasts? — England gives an immense credit; but against that it takes credit for its raw materials. We are drawn on from America always at 60 days, and from other regions at 90 days. On the other side we give credit; when we send goods to Germany we give two or three months.

At question 5131 Wilson asks Chapman whether, when these imported raw materials and colonial wares are shipped, bills on England are not drawn at the same moment as they are loaded, and whether the goods themselves do not arrive together with the bills of lading. Chapman supposes that they do, but he knows nothing about this 'commercial' business and thinks one should ask people who know more. Chapman says that in the export trade to America the goods are, as he puts it, 'symbolized in transit' [5133]; what this rigmarole is meant to say is that the English merchant who exports draws a four-month bill against the goods on one of the big American banking houses in London, and that the banking house receives cover from America.

5136. Are not the transactions with far-off countries as a rule carried on by the merchant who waits for his capital until the goods are sold? — There may be houses of great private wealth that can afford to lay out their own capital without taking advances on the goods; but for the most part these goods are turned into advances by the acceptances of well-known firms. 5137. Those houses are established in London, Liverpool and elsewhere. 5138. So it makes no difference whether the manufacturer has to hand over his own money, or whether he finds a merchant in London or Liverpool who advances it; it is always an advance made in England? — Quite right. The manufacturer has anything to do with it in only a few cases (against that, in 1847 in almost every case). A dealer in manufactured goods, in Manchester say, buys goods and ships them through a respectable house in London; as soon as the London house is satisfied that everything is packed as agreed, he draws six-month bills on the London house against these goods going to India, China or wherever; then the banking world comes in and discounts those bills for him; so that by the time he has to pay for those goods he has the money lying ready thanks to the discounting of those bills. 5139. But if he has the money, the banker must still have advanced it? — The banker has the bill; the banker has bought the bill; he is using his banking capital in that form, namely in discounting commercial bills.

(So even Chapman does not regard the discounting of bills as an advance, but as a purchase of goods. — F. E.)

5140. But that still forms part of the demand on the London money market? — Undoubtedly; that is the essential business of the money market and of the Bank of England. The Bank of England is as glad to get these bills as we are; it knows they are a good investment. 5141. So as the export business grows, the demand on the money market grows too? — As the country's prosperity grows, we (the Chapmans) have our share of it. 5142. So when these various fields for the investment of capital suddenly expand, the natural consequence is a rise in the rate of interest? — No doubt about it.

In 5143 Chapman says he cannot quite understand why, with such large exports, there was so much occasion for gold.

In 5144 the worthy Wilson asks:

May it not be that we give larger credits on our exports than we take on our imports? Chapman's reply: he would doubt that point himself. When a man has a bill accepted against his Manchester goods sent to India, he cannot accept for less than ten months. They have had to pay America for her cotton (that is perfectly true) some time before India pays them; but how that works out is a rather fine point to investigate. 5145. If, as last year, there was an increase in the export of manufactures of £20 million, then beforehand there must already have been a very considerable increase in the import of raw materials (and in this way over-export is already identical with over-import, and over-production with over-trading) in order to produce that larger quantity of goods? — Undoubtedly. [5146.] They must have had to pay a very considerable balance; that is, the balance must have run against them during that time, but in the long run the exchange with America is in our favour, and they have for some time past received considerable supplies of precious metal from America.

In 5148 Wilson asks Chapman, that arch-usurer, whether he does not regard his high rates of interest as a sign of great prosperity and high profits. Chapman, plainly astonished at the naivety of this sycophant, naturally says yes, but is honest enough to add the following qualification:

Chapman added a qualification: some people cannot do otherwise, since they have obligations to meet and must meet them whether it pays or not; but if it goes on lasting (the high rate of interest), it would be a sign of prosperity.

Both men forget that a high rate of interest can also indicate — as it did in 1857 — that the knights errant of credit are making the country unsafe: men who can pay high interest because they pay it out of somebody else's pocket (though in doing so they help to fix the rate for everybody), and who meanwhile live in style on profits they have anticipated. Incidentally, at the same time, this very thing can yield manufacturers and others a genuinely very profitable business. Under the system of advances the returns become completely deceptive. This also accounts for something that needs no explaining so far as the Bank of England is concerned, since when the rate of interest is high it discounts at a lower rate than the others.

5156. Chapman says he can well say that their discounts, at this present moment, when they have had a high rate of interest for so long, are at their maximum.

(Chapman said so on 21 July 1857, a couple of months before the crash.)

5157. In 1852 (when interest was low) they were nowhere near so large.

Because at that time, in fact, business was still much healthier.

5159. If a great flood of money were on the market ... and the Bank's rate of discount low, we would see a fall in the number of bills ... In 1852 we were in a quite different phase. The country's exports and imports then were simply nothing compared with today's. — 5161. At this high rate of discount our discounts are just as large as in 1854. (when interest stood at 5 to 5½ per cent.)

Highly amusing, in Chapman's evidence, is how these people really do treat the public's money as their own property, and believe they have a right to the constant convertibility of the bills they discount. The naivety of the questions and answers is great. It is made out to be the duty of legislation to keep the bills accepted by the great houses always convertible, and to see to it that the Bank of England rediscounts them for the bill-brokers under all circumstances. And yet in 1857 three such bill-brokers failed, with roughly £8 million and an own capital that vanishes beside those debts.

5177. Chapman is asked whether he means that these acceptances — of Barings or Loyds — ought to be discountable under compulsion, in the way a Bank of England note is now exchangeable against gold under compulsion. He thinks it would be a very regrettable thing if they were not discountable, a most extraordinary position: a man having to stop payment although he holds acceptances of Smith, Payne & Co. or Jones, Loyd & Co., because he cannot get them discounted. 5178. Asked whether Barings' acceptance is not an engagement to pay a certain sum of money when the bill falls due, he says that is quite right — but Barings, like every merchant who takes on such an engagement, never dream of having to pay it in sovereigns; they count on paying it at the Clearing House. 5180. Do you think, then, that some kind of machinery should be devised by which the public would have a right to receive money before the bill falls due, through somebody else having to discount it? — No, not from the acceptor; but if you mean that we are not to have the possibility of getting commercial bills discounted, then the whole constitution of things has to be changed. 5182. So you believe it {a commercial bill} would have to be convertible into money, just as a Bank of England note must be convertible into gold? — Quite decidedly, under certain circumstances. 5184. So you believe the arrangements of the currency would have to be shaped so that a commercial bill of undoubted solidity could at all times be exchanged for money as easily as a banknote? — I do. 5185. You do not go so far as to say that the Bank of England or anyone else should be legally compelled to exchange it? — I do go that far: if we make a law to regulate the currency, we should make provision to prevent the possibility of an inconvertibility of the country's commercial bills, so far as those bills are undoubted solid and legitimate.

Here it is the convertibility of the commercial bill that stands against the convertibility of the banknote.

5190. The country's money dealers really only represent the public — as Chapman himself did later before the Assizes in the Davidson case. See the Great City Frauds.

5196. During the quarter times (when the dividends are paid) it is absolutely necessary for us to turn to the Bank of England. If you take £6,000,000 or £7,000,000 of state revenue out of the circulation in anticipation of the dividends, then somebody has to be there who makes that sum available in the interval.

(So in this case what is involved is a supply of money, not of capital or loan capital.)

5169. Anyone who knows our commercial world must know that when we are in such a position that Exchequer bills become unsellable, India bonds are perfectly useless, and the best commercial bills cannot be discounted, there must be great anxiety among those whose business puts them in the position of having to make payments in the country's ordinary circulating medium at a moment's demand — and that is the case with every banker. The effect of this is that everyone doubles his reserve. Now see what the effect of that is across the whole country, when every country banker — and there are about 500 of them — has to instruct his London correspondent to send him £5,000 in banknotes. Even taking such a small sum as the average, which is quite absurd, we arrive at £2,500,000 drawn out of the circulation. How is that to be replaced?

On the other hand, the private capitalists and others who have money will not let it go at any rate of interest, for, as Chapman reports them:

5195. We would rather have no interest at all than be in doubt about whether we can get the money, should we need it.

5173. Our system is this: we have £300,000,000 of obligations that can be called on to be paid in the country's current coin at one single given moment; and that country's coin, if we use the whole of it for that, comes to £23,000,000, or whatever it may be; is that not a state of things that can throw us into convulsions at any moment?

So it is that in crises the credit system suddenly collapses into the monetary system.

Setting aside the domestic panic in crises, the quantity of money can be spoken of only in so far as it is metal, world money. And it is exactly this that Chapman leaves out; he speaks only of £23 million in banknotes.

The same Chapman again:

5218. The original cause of the disturbance in the money market {April and later October 1847} was undoubtedly the quantity of money that was needed to regulate the exchanges, as a consequence of that year's extraordinary imports.

In the first place, this store of world-market money had at that time been reduced to its minimum. In the second place, it was serving at the same time as the security for the convertibility of credit money, of banknotes. So it combined two quite different functions — yet both of them follow from the nature of money itself: real money is always world-market money, and credit money always rests on world-market money.

In 1847, without the suspension of the Bank Act of 1844, the clearing houses would not have been able to settle their business. (5221.)

That Chapman did after all have an inkling of the crisis that was coming:

5236. There are certain states of the money market (and the present one is not very far from it) in which money is very difficult to get, and one has to take refuge with the Bank.

5239. As for the sums we drew from the Bank on Friday, Saturday and Monday, 19, 20 and 22 October 1847, we would only have been too thankful to have got the bills back on the Wednesday that followed; the money flowed back to us the instant the panic was over.

For the Bank Act was suspended on Tuesday, 23 October, and with that the crisis was broken.

Chapman believes at 5274 that the bills of exchange running on London at one and the same time come to £100 million to £120 million. This does not include the local bills on provincial centres.

5287. While in October 1856 the amount of notes in the hands of the public rose to £21,155,000, there was yet an altogether extraordinary difficulty in getting money; although the public held so much of it, we could not get our fingers on it.

That is, as a consequence of the worries caused by the squeeze the Eastern Bank had been in for a time (March 1856).

5290. Once the panic is over,

every banker who makes his profit out of interest immediately sets about employing his money.

5302. Chapman explains the uneasiness when the Bank's reserve falls not by fear about the deposits, but by this: everyone who may suddenly have to pay large sums of money knows very well that in a squeeze on the money market he can be driven to the Bank as a last resort; and

if the Bank has a very small reserve, it is not glad to receive us, quite the contrary.

And a fine thing it is, incidentally, how the reserve disappears as an actual magnitude. For their day-to-day business the bankers hold a minimum, in part with themselves and in part at the Bank of England. The bill-brokers hold the country's 'loose bank money' without any reserve. And against its liabilities for deposits the Bank of England has only the reserve of the bankers and others, along with public deposits and so on, which it lets fall to the lowest point, say to £2 million. Apart from this £2 million in paper, then, in times of pressure (and pressure reduces the reserve, because notes taken in against metal flowing out must be cancelled) this whole swindle has absolutely no other reserve than the metal treasure; and so any reduction of that treasure through a drain of gold adds to the crisis.

5306. If there were no money to settle the transactions at the clearing house, I do not see that anything else would be left us but to come together and make our payments in first-class bills, bills on the Treasury, Smith, Payne & Co., and so on. — 5307. So if the government failed to provide you with a circulating medium, you would create one for yourselves? — What can we do? The public comes in and takes the circulating medium out of our hands; it does not exist. — 5308. You would then be doing only in London what is done in Manchester every day? — Yes indeed.

Chapman's answer is very good to the question that Cayley (a Birmingham man of the Attwood school) puts with reference to Overstone's conception of capital:

5315. It has been stated before the Committee that in a squeeze like that of 1847 men do not look around for money but for capital; what is your opinion on that? — I do not understand you; we deal only in money; I do not understand what you mean by it. — 5316. If by that {commercial capital} you understand the amount of money a man has of his own in his business, if you call that capital, then in most cases it forms a very small part of the money he handles in his affairs through the credit the public gives him — by the mediation of the Chapmans.

5339. Is it a lack of wealth that makes us suspend our specie payments? — Not in the least; ... we have no lack of wealth, but we are moving under a highly artificial system; and if we have an immense threatening (superincumbent) demand on our circulating medium, circumstances may arise that prevent us from getting hold of that circulating medium. Is the whole commercial industry of the country to be paralysed for that? Are we to shut up every avenue of employment? — 5338. If we were faced with the question of which we should maintain, specie payments or the industry of the country, I know which of the two I would let drop.

On the hoarding of banknotes in order to aggravate the squeeze and take advantage of the consequences (5358), he says that this can very easily happen. Three large banks would be enough for it.

5383. It must be known to you, as a man familiar with the great business of our capital city, that capitalists use these crises to make enormous profits out of the ruin of those who fall victim? — There can be no doubt of it.

And we may believe Chapman on this, even though in the end he broke his neck commercially in the very attempt to make enormous profits out of the ruin of the victims. For if his partner Gurney says that every change in business is advantageous for the man who is well informed, Chapman says:

One part of society knows nothing of the other; there, for instance, is the manufacturer who exports to the Continent or imports his raw material — he knows nothing of the other man, who deals in gold bars. (5046.)

And so it came about that one day Gurney and Chapman themselves were not well informed, and made a notorious bankruptcy.

We have already seen that a note issue is not in every case an advance of capital. The piece of Tooke's evidence that comes next — he was speaking to the Lords' Commercial Distress Committee in 1848 — shows one thing only: when capital is advanced, even if the Bank does it by putting out new notes, that does not by itself mean more notes are circulating.

3099. Tooke was asked whether the Bank of England could, for instance, greatly expand its advances and still bring about no extra issue of notes. He answered that there are facts in abundance to prove it, and gave one of the most striking: in 1835, when the Bank used the West India deposits and the loan from the East India Company to make larger advances to the public, the amount of notes in the public's hands actually fell a little at the same time. Something similar was observable in 1846, when the railway deposits were paid into the Bank: the securities (in discount and deposit) rose to about thirty million, while no perceptible effect showed up in the amount of notes in the public's hands.

Besides banknotes, though, wholesale trade has a second means of circulation — and for wholesale trade a far more important one: bills of exchange. Mr Chapman has shown us how much it matters to the regular conduct of business that good bills are taken in payment everywhere and under all circumstances: "Gilt nicht mehr der Tausves Jontof, was soll gelten, Zeter, Zeter!" — a cry of lament quoted from elsewhere, not Chapman's words. So how do these two means of circulation stand to one another?

Gilbart says on this point:

Cut down the amount of notes in circulation, and the amount of bills in circulation regularly goes up. Bills come in two kinds, commercial bills and bankers' bills; when money gets scarce, the money-lenders say, draw on us and we will accept; and when a country banker discounts a bill for a customer, he does not give him cash but his own draft at 21 days on his London agent. These bills do the work of a means of circulation. (J. W. Gilbart, An Inquiry into the Causes of the Pressure, p. 31.)

Newmarch confirms this, in a somewhat modified form, in the Bank Acts evidence, 1857, no. 1426:

There is no connection between the ups and downs in the amount of bills circulating and the ups and downs in the banknotes circulating. The only fairly steady result is that as soon as any pressure on the money market appears — a rise in the rate of discount shows it — the scale of the bill circulation is very much increased, and the other way round.

The bills drawn in such times, however, are by no means only the short bank bills Gilbart mentions. The opposite is true. To a large extent, the bills are accommodation bills that stand for no real transaction at all — or only for transactions that were entered into simply so that bills could be drawn on them. We have given examples enough of both kinds. Hence The Economist (Wilson), comparing the security of such bills with that of banknotes, says:

A note payable on presentation can never stay out in excess, because any excess would always flow back to the bank to be exchanged; a bill at two months, on the other hand, can be issued in enormous excess, since there is no means of controlling the issue until it matures — and by then it may perhaps already have been replaced by others. That a nation should accept the safety of a circulation of bills payable at a future date, and yet raise doubts about a circulation of paper money payable on presentation, is to us completely incomprehensible. (The Economist, 1847, p. 575.)

So the quantity of bills in circulation, like the quantity of banknotes, is determined solely by the needs of commerce. In ordinary times in the 1850s, alongside £39 million in banknotes there circulated in the United Kingdom about £300 million in bills, of which £100-£120 million were on London alone. How far the bills circulate has no influence on the volume of the note circulation, and the notes influence the bills only in times of tight money, when the quantity of bills grows and their quality gets worse. Finally, at the moment of crisis, the bill circulation fails completely: nobody can use promises to pay, since everyone will take only cash; only the banknote keeps its ability to circulate, at least up till now in England, because the nation with its entire wealth stands behind the Bank of England.

In 1857 Chapman was himself a magnate on the money market — and even he complained bitterly. There were several big money capitalists in London, he said, strong enough to throw the whole money market into disorder at a given moment, and in that way to fleece the smaller money-dealers most shamefully. There were several such great sharks, he said, who could make a squeeze considerably worse by selling off £1 or £2 millions of Consols and so taking an equal amount of banknotes out of the market — and with them an equal amount of available loan capital. To turn a squeeze into a panic by the same manoeuvre, three big banks pulling together would be enough.

In London, the Bank of England is of course the greatest capital power. Its standing as a semi-state institution keeps it from throwing its weight about so nakedly. That costs it nothing: it has ways enough of seeing to its own — particularly since the Bank Act of 1844.

The Bank of England has a capital of £14,553,000. On top of that it disposes of a 'balance' of some £3 million, that is, undistributed profits, and of all the money the government takes in through taxes and so on, which has to be deposited with the Bank until it is used. Add the rest of the deposit money (in ordinary times about £30 million) and the banknotes issued without backing, and Newmarch's estimate will still strike you as fairly modest when he says (B. A. 1857, no. 1889):

He had satisfied himself that the total of the funds constantly at work in the London money market could be put at roughly £120 million; and of that £120 million the Bank of England wields a very considerable part, something like 15 to 20 per cent.

In so far as the Bank issues notes that are not covered by the metal in its vaults, it creates tokens of value. Those notes are not only means of circulation; at the nominal amount of these uncovered notes they also form extra capital for the Bank — fictitious capital, but extra capital all the same. And this extra capital throws off an extra profit for it. — In the 1857 Bank Acts inquiry, Wilson asks Newmarch:

1563. A bank's own notes in circulation, that is, the amount that on average stays in the hands of the public, form an addition to that bank's effective capital, do they not? — Certainly they do. — 1564. So all the profit the bank draws from that circulation is a profit that comes from credit, and not from a capital it actually possesses? — Certainly.

The same holds for the private note-issuing banks. In his answers 1866-1868 Newmarch treats two-thirds of the notes they issue as so much capital created — for the last third they must hold metal reserves — because metal money to that amount is saved. The banker's profit may be no greater than any other capitalist's. He still draws it from this national saving of metal money, and that a national saving appears as a private profit does not shock the bourgeois economist at all, since profit in general is the appropriation of national labour. Was anything crazier than the Bank of England, 1797 to 1817, its notes having credit only through the state, being paid by the state — that is, by the public — in interest on state loans, for the power to turn those notes into money and lend it back to the state?

The banks have other means besides of creating capital. According to the same Newmarch, the provincial banks, as mentioned earlier, are in the habit of sending their surplus funds — that is, Bank of England notes — to London bill-brokers, who send them discounted bills of exchange back. The bank serves its customers with these bills, since its rule is not to hand out again the bills it receives from its local customers, so that those customers' business does not become known in their own neighbourhood. The bills it gets from London are not only issued to customers who have payments to make directly in London, where these do not prefer to have the bank write out its own draft on London; they also serve to settle payments in the provinces, because the banker's endorsement secures them local credit. In Lancashire, for instance, they have driven out of circulation all the local banks' own notes and a great part of the Bank of England's notes. (ibid., nos. 1568 to 1574.)

So here we can watch the banks bringing credit and capital into being. First, they put out banknotes of their own. Second, they draw drafts on London that run for as long as twenty-one days — but these are paid to the bank in cash the moment they are drawn. Third, they pay away bills of exchange they have discounted, bills whose creditworthiness is produced, to begin with and essentially, by the bank's endorsement — at least so far as the local district concerned goes.

The Bank of England's power shows itself in the way it regulates the market rate of interest. When business follows its ordinary course, it can happen that the Bank of England cannot block a moderate outflow of gold from its metal reserve by raising its discount rate, since the need for means of payment is met by the private banks and joint-stock banks and the bill-brokers, which have gained considerably in capital power over the last thirty years. It has to use other means then. For critical moments, though, what the banker Glyn (of Glyn, Mills, Currie & Co.) stated in his evidence before the Committee on Commercial Distress of 1848-57 still applies:

1709. In times of great pressure on the country, the Bank of England commands the rate of interest. — 1710. In times of extraordinary pressure, ... when the discounts of the private bankers or brokers are cut back relatively, they fall on the Bank of England, and then it has the power to fix the market rate of interest.

Of course, as a public institution under state protection and holding state privileges, it may not exploit this power without mercy, as private businesses are allowed to. And that is why Hubbard says before the Bank Acts Committee of 1857:

2844. (Question:) Is it not the case that when the discount rates are at their highest the Bank of England is the cheapest place to be served, and when they are at their lowest the brokers are the cheapest? — (Hubbard:) That will always be the case, because the Bank of England never goes as low as its competitors, and when the rate is highest it never goes quite as high.

All the same, it is a serious event in business life when the Bank, in a squeeze, does what people call putting the screw on — that is, pushes an interest rate that is already above the average up even higher.

J. W. Gilbart reported that the moment the Bank of England turns the screw, all buying for export abroad stops ... the exporters hold off until the slump in prices has reached its lowest point, and only then, not before, do they buy. But by the time that point is reached the rates have steadied again — gold stops being exported before this lowest point of the depression is reached. Purchases of goods for export may possibly bring some of the gold sent abroad back, but they arrive too late to prevent the outflow (J. W. Gilbart, An Inquiry into the Causes of the Pressure on the Money-Market, London 1840, p. 35). Gilbart adds in the same work (p. 40) that another effect of governing the means of circulation by way of the foreign exchanges is that in times of squeeze it brings about an enormous rate of interest. And at p. 52 he says that the cost of restoring the exchanges falls on the country's productive industry, while in the course of that process the Bank of England's profit is positively raised, because it carries on its business with a smaller amount of precious metal.

But friend Samuel Gurney says:

these great fluctuations in the rate of interest are advantageous to bankers and money-dealers — all fluctuations in business are advantageous to the man who knows the ropes.

And even if the Gurneys skim off the cream of the ruthless exploitation of business distress, while the Bank of England may not allow itself the same freedom, quite handsome profits fall to it as well — not to speak of the private profits that drop of themselves into the laps of the gentlemen directors, given their exceptional opportunity to know the general state of business. According to evidence given before the Lords Committee of 1817 on the resumption of cash payments, these profits of the Bank of England for the whole period from 1797 to 1817 came to:

over nineteen years, this being on a capital of £11,642,400 (D. Hardcastle, Banks and Bankers, 2nd edn, London 1843, p. 120). If we now estimate the total profit of the Bank of Ireland — it too suspended cash payments in 1797 — on the same principle, we get the following result:

on a capital of £3 million (ibid., pp. 363, 364).

Talk about centralization! The credit system, whose centre is the supposedly national banks and the big money-lenders and usurers around them, is one enormous centralization, and it gives this class of parasites a fabulous power: not only to thin out the industrial capitalists at regular intervals, but to interfere in actual production in the most dangerous way — and this crew knows nothing of production and has nothing to do with it. The Acts of 1844 and 1845 give proof of the growing power of these bandits, and the financiers and stock-jobbers attach themselves to them.

Yet if someone still doubts that these honourable bandits exploit national and international production only for the sake of production and of the exploited themselves, the homily that follows, on the high moral dignity of the banker, will certainly teach him better:

Banking establishments are religious and moral institutions. How often has the fear of being seen by the watchful, disapproving eye of his banker kept a young tradesman back from the company of noisy and dissolute friends? What anxiety he has to stand well in the banker's estimation, always to appear respectable! The banker's frown has more influence on him than his friends' moral sermons. Does he not tremble at being suspected of a deception or the slightest false statement, for fear this might raise suspicion, and his bank accommodation be consequently restricted or called in? The banker's advice matters more to him than the clergyman's. (G. M. Bell, a Scottish bank director, The Philosophy of Joint Stock Banking, London 1840, pp. 46, 47.)