When money is tight, notes get stockpiled. And that is something old: it is the hoarding of precious metals coming round again, the way it happens in unsettled times under the most primitive conditions of society.

The Act of 1844 is interesting for what it does, because it wants to turn all the precious metal in the country into means of circulation. It seeks to equate a drain of gold with a contraction of the means of circulation, and an inflow of gold with an expansion of the means of circulation. Put to the test, it proved the opposite.

With one single exception, which we shall mention in a moment, the mass of Bank of England notes in circulation has never since 1844 reached the maximum the Bank was permitted to issue. And the crisis of 1857 proved, conversely, that there are circumstances in which that maximum does not suffice. Between 13 and 30 November 1857, a daily average of £488,830 was in circulation above that maximum (B. A. 1858, p. xi). At that time the statutory maximum stood at £14,475,000, with the metal reserve in the Bank's cellars added on top.

On the inflow and outflow of precious metal, two things are to be noted.

First, two movements have to be kept apart: the metal running back and forth inside a region that produces no gold and silver, and, on the other side, the stream of gold and silver that comes from where they are produced, passes through the various other countries, and is then shared out among those countries as fresh supply.

Before the Russian, Californian and Australian gold mines made themselves felt, the supply since the beginning of this century had only been enough to replace worn coins, to serve the customary use as a luxury material, and to cover the export of silver to Asia.

Since then, however, several things changed. First, along with the Asian trade of America and Europe, the export of silver to Asia grew enormously. The silver shipped out of Europe was largely replaced by the extra gold. Further, part of the newly imported gold was taken up by domestic money circulation: it is estimated that up to 1857 roughly £30 million of gold went into England's domestic circulation in this way. Then, since 1844, the average level of the metal reserves rose in every central bank of Europe and North America. And because domestic money circulation grew, it followed that after a panic, in the stagnation that came next, bank reserves grew faster still — a larger mass of gold coin had been thrust out of domestic circulation and left lying immobilized. Finally, since the new gold discoveries, the consumption of precious metal for luxury articles has risen, as wealth has grown.

Second. Between countries that produce no gold and silver, precious metal constantly flows out and constantly flows in. The same country is always importing it and always exporting it. What decides whether an outflow or an inflow comes about in the end is only a preponderance of the movement to one side or the other, since movements that do nothing but oscillate, and often run side by side, largely cancel each other out.

But for that very reason — because the eye is on this result — the constancy of the two movements, and the fact that they broadly run parallel, is overlooked. It is always taken as though an excess import or excess export of precious metal were only the effect and expression of the relation between the import and export of commodities, whereas it is at the same time the expression of a relation between the import and export of precious metal itself that is independent of commodity trade.

Third. When imports outweigh exports, or the other way round, you can broadly read this off the rise or fall of the metal reserve held by the central banks. How exact that gauge is depends, first of all, on how far the banking system is centralized at all. For everything hangs on how far the precious metal piled up in the so-called national bank really stands for the country's whole metal stock. But grant that it does: even then the gauge is not exact. In certain circumstances extra metal coming in gets swallowed up by domestic circulation and by the growing use of gold and silver for luxury. And the other way round: without any extra import at all, gold coin can be pulled out for circulation at home, so the metal reserve can shrink even though exports have not risen at the same time.

Fourth. A metal export turns into a drain when the decline keeps going for a long stretch, so that the fall presents itself as the tendency of the movement and presses the bank's metal reserve well below its average level, down towards something like its average minimum. That minimum is set more or less arbitrarily, since legislation on the backing for cash payment of notes and the like fixes it differently in each particular case. As to the quantitative limits such a drain could reach in England, Newmarch says this before the Bank Acts Committee of 1857, Evidence no. 1494:

Newmarch told the Bank Acts Committee in 1857 that, so far as experience goes, a flow of metal out of the country brought on by any swing in foreign trade is most unlikely ever to exceed £3,000,000 or £4,000,000.

In 1847 the Bank of England's gold reserve reached its lowest point on 23 October. That was £5,198,156 below its level on 26 December 1846, and £6,453,748 below its highest point in that year, 29 August.

Fifth. The metal reserve of the so-called national bank has three functions. But these functions are far from being the only thing that regulates the size of the metal hold, since it can also grow through the mere paralysis of domestic and foreign business.

The three functions are: 1. a reserve fund for international payments, in a word a reserve fund of world money. 2. a reserve fund for the domestic metal circulation as it alternately expands and contracts. 3. something that belongs to the banking function and has nothing to do with money as mere money: a reserve fund for paying deposits and for keeping notes convertible.

So the reserve can be affected by conditions touching any one of these three functions. As an international fund it answers to the balance of payments, whatever the reasons determining that balance and whatever its relation to the balance of trade. As a reserve fund for the domestic metal circulation, it answers to that circulation's expansion or contraction.

The third function, as a guarantee fund, does not by itself set the reserve's independent movement, but it works in two ways. If notes are issued that replace metal money in domestic circulation — and in countries where silver is the measure of value, that means silver coin too — then the second function of the reserve fund drops out. And part of the precious metal that had served there now moves abroad for good. In that case no metal coin is drawn out for domestic circulation, and so the temporary strengthening of the metal reserve — the locking up of a part of the circulating coined metal inside the reserve — also drops out. Further: if a minimum metal reserve has to be held under all circumstances for paying out deposits and keeping notes convertible, that affects a drain or an influx of gold in its own particular way. It bears on the part of the reserve that the bank is bound to hold under all circumstances, or else on the part it would at other times try to get rid of as useless. Where circulation is purely metallic and banking is centralized, the bank would likewise have to treat its metal reserve as a guarantee for paying out its deposits, and a drain of metal could bring on the same panic as in Hamburg in 1857.

Sixth. With the possible exception of about 1837, the real crisis has always broken out only after the exchanges had turned; that is, once the import of precious metal had again got the upper hand over the export.

In 1825 the real crash came after the gold drain had stopped. In 1839 there was a gold drain and no crash came. In 1847 the gold drain stopped in April and the crash came in October. In 1857 the gold drain abroad had stopped by the beginning of November; the crash came later that November.

This comes out especially clearly in the crisis of 1847. In that instance the gold outflow had already come to an end in April, after it had brought on a comparatively mild pre-crisis; the genuine commercial crisis did not break out until October.

The statements that follow were given to the Secret Committee of the House of Lords on Commercial Distress, 1848. The witness testimony (evidence) only reached print in 1857, and is also cited as C.D. 1848/1857.

Statements by Tooke:

Tooke testified that in April 1847 a stringency arose that, strictly speaking, amounted to a panic, though brief and without significant commercial failures; that October's stringency was far more intense, with an almost unheard-of number of bankruptcies (2996); that in April the exchange rates, especially with America, forced a considerable export of gold to pay for unusually large imports, and only an extreme effort by the Bank stopped the drain and drove the rate up (2997); that by October the rates favoured England (2998), the turn having begun in the third week of April (3000); that they fluctuated in July and August, favouring England from early August (3001); and that August's gold drain sprang from demand for internal circulation (3003).

J. Morris, Governor of the Bank of England: although the rate of exchange had turned in England's favour after August 1847, and gold had flowed in for that reason, the metal reserve in the Bank still declined.

Morris reported that £2,200,000 in gold went out into the country because of domestic demand (137), explained partly by the growing employment of workers on railway building, and partly by bankers wishing to hold a gold reserve of their own in times of crisis (147).

Palmer, former Governor and a director of the Bank of England since 1811:

Palmer testified, in answer 684, that throughout the period from the middle of April 1847 to the day the Bank Act of 1844 was suspended, the exchange rates favoured England.

So the metal drain that brought about a monetary panic of its own in April 1847 is here, as always, only a precursor of the crisis, and it had already turned before the crisis broke out. In 1839, under heavy business pressure, there was a very strong metal drain — for corn and so on — but no crisis and no monetary panic.

Once the general crises have burned out, gold and silver are again shared out in the proportions in which it existed as the separate hoard of the different countries, when things were in equilibrium. Left out of account here is the inflow of fresh precious metal from the countries that produce it.

With circumstances otherwise equal, each country's share will be fixed by the role that country plays on the world market. Metal flows out of a country that holds more than its normal share and towards another; these movements of ebb and flow do no more than restore its original distribution among the different national reserves.

This redistribution, though, is mediated: it works through the effect of various circumstances, which get mentioned when the exchange rates are dealt with. Once the normal distribution is back — past that point — growth comes first, and then a drain again. (This last sentence of course applies only to England, as the centre of the world money market. — F. E.)

A drain of metal is mostly a symptom of a change in the state of foreign trade, and that change is itself an advance warning that things are again ripening towards a crisis.

The balance of payments can run in Asia's favour, against Europe and America.

Precious metal flows into a country mainly at two moments. The first is the early stretch of low interest rates that comes after a crisis — a stretch that is itself a sign of production having been cut back. The second is the phase where the interest rate is on the rise but has not yet attained its average level. In that phase returns come in easily, commercial credit is large, and so the demand for loan capital does not rise in step with the growth of production. In both phases, loan capital is relatively abundant. And in both, the extra metal arriving must have a strong effect on the rate of interest, and with it on the tone of business as a whole — because this is capital in the form of gold and silver, a form in which it can at first do nothing except serve as loan capital.

On the other side: a drain — a continued, heavy export of precious metal — sets in only once receipts have stopped coming in easily, the markets are overstocked, and the apparent prosperity is being held up by credit alone. That is, only once the demand for loan capital is already much stronger, so that the rate of interest stands at least at its average level. These are exactly the circumstances that the drain of precious metal mirrors. And under them, the effect of a continued withdrawal of capital is greatly intensified — because the capital is being taken out in a form in which it exists directly as loanable money capital. This must work directly on the rate of interest. But instead of the rising rate putting a brake on credit business, it widens it and drives the straining of every resource it has to the limit. This period therefore comes before the crash.

Newmarch is asked (B. A. 1857):

1520. So the volume of bills in circulation rises with the rate of discount? — It seems so. 1522. In quiet, ordinary times the ledger is the actual instrument of exchange; but when difficulties arise, when, for instance, under circumstances such as I have suggested, the Bank's discount rate is raised ... then business resolves itself of its own accord into drawing bills. Bills of this kind are not only better suited to serve as legal proof of the transaction that has been concluded, but also fit better the purpose of making further purchases, and above all they are usable as a means of credit for raising capital.

On top of this: as soon as circumstances look at all threatening and the Bank raises its discount rate — which at the same time makes it likely that the Bank will limit the length of run of the bills it is prepared to discount — a general fear sets in that the rate will keep climbing. So everyone, and above all the credit-jobber, tries to discount the future and to have as many means of credit as possible at his command in the given moment.

The grounds just given come down to this: the mere quantity of precious metal, whether imported or exported, does not act as such. It acts, first, through what is specific to precious metal as capital in the money form. And second, it acts like the feather laid on the scale, which is enough to send the already-swaying pan down for good on one side; it acts because it comes in at a moment when any excess on this side or that decides the matter. Without these grounds it would be quite impossible to understand how a drain of gold of, say, £5-£8 million — and that is the limit of what has been experienced so far — could have any significant effect at all. This small bit more or less of capital looks insignificant even against the £70 million in gold that circulates in England on average, and it is in fact a vanishing quantity within a production on England's scale.

But it is precisely the development of the credit and banking system that on the one hand drives all money capital into the service of production (or, what comes to the same thing, turns all money income into capital), and on the other hand, at a certain phase of the cycle, cuts the metal reserve down to a minimum at which it can no longer carry out the functions that fall to it. It is this developed credit and banking system that produces this oversensitivity of the whole organism. At less developed stages of production, a hoard that shrinks or grows against its average measure is a relatively indifferent matter. And even a very large drain of gold, on the other hand, is relatively without effect if it does not come in the critical period of the industrial cycle.

In the explanation just given, we have left aside the cases in which the metal drain comes about as a result of harvest failures and the like. There, the drain is the expression of a great and sudden disturbance of the balance of production, and that disturbance itself needs no further explanation of its effect. The effect is all the greater, the more such a disturbance falls in a period when production is working under high pressure.

We have also left aside, so far, the function of the metal reserve as the guarantee that banknotes can be converted, and as the pivot of the whole credit system. The central bank is the pivot of the credit system. And the metal reserve, in its turn, is the pivot of the bank. The collapse of the credit system into the monetary system is necessary, as I already showed in Volume 1, Chapter 3, when I dealt with money as a means of payment. That the greatest sacrifices of real wealth are needed to hold the metal basis at the critical moment is conceded by Tooke as much as by Loyd-Overstone. The dispute turns only on a plus or minus, and on how rationally the unavoidable is handled. A certain quantity of metal, insignificant compared with total production, is acknowledged as the pivot of the system.

Hence — quite apart from the terrifying demonstration of the metal's pivotal character in crises — the beautiful theoretical dualism. So long as it treats "of capital" as its declared subject, enlightened economics looks down on gold and silver with the greatest contempt, as the most indifferent and most useless form capital can take. As soon as it turns to banking, all of that is reversed, and gold and silver become capital par excellence — the thing for whose sake every other form of capital and labour has to be given up. But how, then, do gold and silver differ from the other forms of wealth? Not by the size of their value — that is determined by the quantity of labour embodied in them. They differ as independent incarnations, expressions of the social character of wealth. (The wealth of society exists only as the wealth of individuals, who are its private owners. It proves itself social only in this, that these individuals, to satisfy their needs, exchange qualitatively different use-values with one another. Under capitalist production they can achieve this only through money. Thus it is only by means of money that the individual's wealth is realized as social wealth; in money, in this thing, the social nature of this wealth is embodied. - F. E.)

So this social existence of gold and silver appears as a beyond, as a thing, an object, a commodity, alongside and outside the real elements of social wealth. So long as production runs smoothly, this is forgotten. Credit, which is likewise a social form of wealth, pushes money aside and usurps its place. What makes the money form of products look like something that merely passes away, something ideal, a mere notion, is confidence in the social character of production. But once credit is shaken — and this phase always arrives of necessity in the cycle of modern industry — all real wealth is then supposed to be turned, in reality and all at once, into money, into gold and silver: a mad demand, yet one that of necessity grows out of the system itself. And all the gold and silver meant to meet these enormous claims amounts to a few millions in the bank's cellars.

In the effects of the gold drain, then, the fact that production is not really subject to social control, as social production, comes out strikingly in this form: the social form of wealth exists as a thing outside it. In fact the capitalist system shares this trait with earlier systems of production, in so far as these rest on commodity trade and private exchange. But it comes out most strikingly, and in the most grotesque form of absurd contradiction and unreason, only in this system, because 1. in the capitalist system production for immediate use-value, for the producers' own use, is most completely abolished, so wealth exists purely as a social process, presenting itself as production and circulation interwoven; 2. because with the development of the credit system capitalist production constantly strives to overcome this metallic barrier — a barrier to wealth and to its movement that is at once material and fantastic — and yet again and again breaks its head on this barrier.

In the crisis the demand comes up that every bill of exchange, every security, every commodity should be convertible into bank money at one and the same instant — and all of that bank money again into gold.

It is a familiar fact that the rate of exchange acts as the barometer of the international movement of the money metals. Suppose England has more payments to make to Germany than Germany has to make to England. Then, in London, the price of the mark, stated in sterling, goes up, while in Hamburg and Berlin the price of sterling, stated in marks, goes down. If this excess of English payment obligations to Germany is not evened out again — by Germany buying more from England, say — then the sterling price of bills on Germany has to rise to the point where it becomes worth while to send metal to Germany in payment instead of bills: gold coin or bullion. That is the typical course.

If this export of precious metal grows bigger and lasts longer, England's bank reserve is attacked, and the English money market — above all the Bank of England — must take protective measures. As we saw earlier, these measures amount in the main to raising the rate of interest. When the drain of gold is significant, the money market is regularly tight: the demand for loan capital in the money form far outweighs the supply, and the higher rate of interest follows from that quite of itself; the discount rate decreed by the Bank of England answers to the situation and makes its way in the market. But there are also cases where the metal drain springs from something other than ordinary business combinations (loans to foreign states, capital investment abroad, and so on). There the London money market as such by no means justifies an effective raising of the rate of interest, and the Bank of England must first "make money scarce" by heavy borrowing "on the open market", as the phrase goes, so as to create artificially the situation that justifies a rise in the rate or makes it necessary — a manoeuvre that becomes harder for the Bank every year. — F. E.

How does this raising of the rate of interest affect the rates of exchange? The statements that follow, made to the 1857 House of Commons Committee on Bank Legislation, show it (cited as B. A. or B. C., 1857).

John Stuart Mill:

Mill was asked how this works. At question 2176 he said that when business has become difficult there is a considerable fall in the price of securities; that foreigners have English railway shares bought up for them, or English owners of foreign railway shares sell them abroad; and that to that extent the transfer of bullion is prevented. He went on at 2182: there is a large and wealthy class of bankers and dealers in securities, the people through whom the rate of interest and commercial pressure are normally equalized between different countries, and they are always on the look-out to buy securities that promise to rise — the right place for them to buy is the country that is sending gold abroad. And at 2183: such investment of capital took place on a considerable scale in 1847, enough to have relieved the drain.

J. G. Hubbard, a former Governor of the Bank of England and on its directorate since 1838:

Hubbard's evidence came in two parts. At 2545 he said that there are great quantities of European securities which have a European circulation on all the different money markets, and that these, as soon as they fall by 1 or 2 per cent in one market, are immediately bought up for sending on to the markets where their value has held. At 2565: are not foreign countries considerably in debt to English merchants? Very largely. At 2566: so collecting those debts might on its own account explain a very large accumulation of capital in England? In 1847, he answered, our position was in the end restored by our striking off so many millions that America and Russia had previously owed to England.

England owed those very countries at the same time "so many millions" for corn, and did not fail, on this side too, to "strike off" the greater part of it by way of the bankruptcy of English debtors. See, above in Chapter 30, the 1857 report on the Bank Acts.

At 2572 Hubbard gave the Petersburg case. In 1847 the rate of exchange between England and Petersburg stood very high. When the government letter came out, authorizing the Bank to issue banknotes without being bound by the prescribed limit of £14,000,000 (over and above the gold reserve), the condition attached was that the discount rate had to be held at 8 per cent. At that moment, and at that rate of discount, it was a profitable business to have gold shipped from Petersburg to London and, once it arrived, lent out at 8 per cent until the three-month bills drawn against the gold sold fell due. At 2573: in all gold operations there are many points to be weighed; everything turns on the rate of exchange and on the rate of interest at which the money can be placed until the bill (drawn against it) matures.

The rate of exchange with Asia

Two things matter here. First, these points show how England, when its rate of exchange with Asia turns against it, must recover itself from other countries whose imports from Asia are paid through English intermediaries. Second, they show Mr Wilson making the same stupid attempt as before: to treat the effect of an export of precious metal on the rates of exchange as the same thing as the effect of an export of capital in general on those rates. In both cases he is talking about an export that is not a means of payment or a means of purchase, but an export for capital investment.

To begin with, it is obvious that if so many million pounds are sent to India to be invested there in railways, then whether they go as precious metal or as iron rails is simply a difference of form: the same amount of capital is transferred from one country to another either way. It is a transfer that does not enter the ordinary commercial accounts, and the exporting country expects no other return for it than the later yearly revenue from what these railways earn.

If this export takes the form of precious metal, then — because precious metal is directly loanable money capital, and the basis of the whole money system — it will act directly on the money market, and so on the rate of interest, of the country exporting that metal. Not necessarily under all circumstances, but under more developed conditions. It acts just as directly on the rate of exchange. Precious metal is sent only because, and only in so far as, the bills on India offered on the London money market are not enough to make these extra remittances. So there is more demand for bills on India than supply, and the rate turns for the moment against England — not because England owes India money, but because it has extraordinary sums to send to India. In the longer run, sending precious metal to India like this must raise India's demand for English goods, because it indirectly increases India's capacity to consume European goods.

If the capital is sent as rails and so on, on the other hand, it cannot have any effect at all on the rate of exchange, because India has no repayment to make for them. And precisely for that reason, no effect on the money market need follow from it. Wilson tries to extract such an effect by arguing that extra outlay of this kind brings an extra demand for monetary accommodation, and so will act on the rate of interest. This can be the case; but to claim that it must happen under all circumstances is completely wrong. No matter where the rails are dispatched and laid down, on English or on Indian soil, they amount to nothing other than a definite expansion of English production in a given sphere. To claim that production cannot expand, even very substantially, without driving the rate of interest up is foolishness. Monetary accommodation may grow — that is, the sum of dealings that involve credit operations; but those operations can grow while the given rate of interest stays the same. That is in fact what happened in England during the railway mania of the 1840s. The rate of interest did not rise. And it is plain that as far as real capital goes — here, commodities — the effect on the money market is exactly the same whether these commodities are meant for abroad or for use at home. There could only be a difference if England's investments abroad acted as a limit on its commercial exports — the exports that have to be paid for and so bring a return — or in so far as those investments were already a symptom of credit being overstrained and of swindling operations beginning.

In what follows, Wilson asks the questions and Newmarch gives the answers.

1786. Newmarch is asked whether he still believes that the exchanges with India were in England's favour, despite the great quantities of bullion continually sent to the East, and whether he has grounds for that. He has. The actual value of exports from the United Kingdom to India in 1851 came to £7,420,000. To that must be added the India House drafts — the funds the East India Company draws from India to cover its own expenditure — which came to £3,200,000 that year, making total exports from the United Kingdom to India £10,620,000. By 1855 the actual value of goods exported had risen to £10,350,000, and the India House drafts were £3,700,000, so the total export came to £14,050,000. For 1851 he believes there is no way of stating the actual value of goods imported from India into England, but for 1854 and 1855 there is. In 1855 the total actual value of goods imported from India into England was £12,670,000, and that sum, set against the £14,050,000, leaves a balance in England's favour in the direct trade between the two countries of £1,380,000.

Wilson remarks on this that the rates of exchange are touched by indirect trade as well. Exports from India to Australia and North America, for instance, are covered by drafts on London, and so act on the rate of exchange exactly as if the goods went straight from India to England. And if India and China are taken together, the balance is against England, since China continually has large payments to make to India for opium, while England has payments to make to China, and the sums travel on to India by that detour. (1787, 1788.)

1791. Wilson now asks whether the effect on the rates of exchange would not be the same whichever way the capital went out — in the form of iron rails and locomotives, or in the form of coin. Newmarch answers quite correctly: the £12 million sent to India in recent years for railway building served to buy an annuity that India has to pay to England at regular dates.

As far as an immediate effect on the bullion market goes, the investment of the £12 million can have one only in so far as metal actually had to be sent out for real disbursement in money.

1797. Weguelin asks him: if no return is made for this iron — the rails — how can it be said to affect the rate of exchange?

Newmarch does not think that the part of the outlay sent out in the form of commodities affects the state of the exchange at all. The state of the rate between two countries is affected, one might say exclusively, by the quantity of obligations or bills offered in the one country, compared with the quantity offered in the other against them; that is the rational theory of the rate of exchange. As for the sending of the £12 million: the money was first subscribed here. If the business had been such that the whole of that £12 million had to be laid down in Calcutta, Bombay and Madras in coin, this sudden demand would act violently on the price of silver and on the rate of exchange, just as if the East India Company announced tomorrow that it was raising its drafts from £3 million to £12 million. But half of the £12 million is spent buying commodities in England — iron rails, timber and other materials. It is an outlay of English capital in England itself, for a particular kind of goods to be sent to India, and with that the matter ends.

1798. Weguelin asks: but producing those goods of iron and timber needed for the railways does produce a large consumption of foreign goods, and could that not affect the rate of exchange? Certainly it could.

Wilson now argues that the iron largely represents labour, and that the wages paid for that labour largely represent imported goods (1799). He then asks:

1801. Speaking quite generally, he asks: if the goods that have been produced by consuming those imported goods are sent abroad in such a way that we receive no return for them, whether in products or otherwise, would that not have the effect of making the rates of exchange unfavourable for us?

Newmarch: that principle is exactly what took place in England during the time of the great railway building {1845}. For three, four, five years running, £30 million was laid out on railways, and nearly all of it in wages. For three years, the building of railways, locomotives, carriages and stations kept a larger population employed than all the factory districts together. These people spent their wages on tea, sugar, spirits and other foreign goods; those goods had to be imported; and yet it is a fact that during the time this great outlay was going on the rates of exchange between England and other countries were not materially disturbed. There was no efflux of bullion; on the contrary, rather an influx.

1802. Wilson insists that, with the trade balance settled and the rate at par between England and India, sending the extra iron and locomotives must affect the rate of exchange with India. Newmarch cannot see this, so long as the rails go out as capital investment and India does not have to pay for them in this form or that. He adds:

He agrees with the principle that no country can have an unfavourable rate of exchange, in the long run, with every country it trades with; an unfavourable rate with one country necessarily produces a favourable rate with another.

At this Wilson throws the triviality at him:

1803. Would a transfer of capital not be the same whether the capital is sent in this form or that? — As regards the obligation, yes, it would.

1804. So whether you send out precious metal or goods, the effect of building railways in India on the capital market here would be the same, and would raise the value of capital just as much as if the whole sum had been sent out as precious metal?

If iron prices failed to rise, then in any case that proved that the "value" of the "capital" locked up in the rails had not grown. The question here concerns the value of money capital — the rate of interest. Wilson wants to identify money capital with capital in general.

To begin with, the plain fact is that £12 million had been subscribed in England for Indian railways. This has nothing directly to do with the rates of exchange, and what the £12 million is designated for is equally a matter of indifference to the money market. Where the money market is favourably placed, this need produce no effect at all, just as the English railway subscriptions of 1844 and 1845 likewise left the money market untouched. If the money market is already somewhat difficult, the rate of interest could indeed be affected by it — but only in the direction of a rise — and by Wilson's theory that would have to work favourably on the exchanges for England, that is, check the tendency to export precious metal; if not to India, then somewhere else. Mr Wilson jumps from one thing to another. In question 1802 the rates of exchange were to be affected; in number 1804 the "value of capital" — two very different things. The rate of interest may act on the rates of exchange, and the rates may act on the rate of interest; but with changing rates the rate of interest can remain constant, and with a changing rate of interest the rates can remain constant. Wilson cannot get it into his head that when capital is sent abroad, the mere form in which it is sent makes such a difference to the effect — that the difference in the form of the capital carries this much weight, and its money form at that. Which contradicts enlightened economics very badly indeed. Newmarch answers Wilson one-sidedly, in that he does not even draw his attention to the fact that he has suddenly, and without reason, leapt from the rate of exchange to the rate of interest. To that question 1804 Newmarch answers uncertainly and waveringly:

Newmarch said there was no doubt about it: if £12 million is to be raised, then, so far as the general rate of interest goes, it makes no difference whether those £12 million are to be sent out in precious metal or in materials. I believe, however (a fine transition, this "however", when what he wants to say is the exact opposite) that this is not quite a matter of indifference (it is a matter of indifference, but all the same it is not a matter of indifference), for in the one case the £6 million would flow straight back, whereas in the other they would not flow back so quickly. Hence it would make some (what definiteness!) difference whether the £6 million is laid out here in the country or sent out of it altogether.

What is that supposed to mean — that the £6 million would flow straight back? In so far as the £6 million has been spent in England, it exists in rails, locomotives and so on that are sent to India, from where they do not return, and their value comes back only through amortization, that is, very slowly, whereas the £6 million in precious metal might return in kind very quickly. In so far as the £6 million has been spent on wages, it has been eaten up; but the money in which it was advanced still circulates in the country as before, or forms a reserve. The same goes for the profits of the rail producers and for the part of the £6 million that replaces their constant capital. So the ambiguous phrase about "return" is used by Newmarch only in order not to say outright: the money has stayed in the country, and in so far as it functions as loanable money capital, the only difference for the money market (apart from the fact that circulation may have swallowed more coin) is that it is spent on A's account instead of B's. Investment of this kind, where capital is transferred to foreign countries in commodities and not in precious metal, can affect the rates of exchange only in so far as producing these exported goods requires extra imports of other foreign goods — and not the rate with the country in which the investment is made. This production is then not meant to settle that extra import. But the same thing happens with any export on credit, whether it is capital investment or ordinary trade. Besides, this extra import can in turn call forth an extra demand for English goods, for instance from the colonies or the United States.

At question 1786 Newmarch said that because of the East India Company's drafts, English exports to India were greater than imports from India. Sir Charles Wood cross-examines him on this point. That excess of English exports to India over imports from India is in fact brought about by an import from India for which England pays no equivalent: the East India Company's drafts - now the Indian government's - come down to a tribute levied on India. Take 1855: imports from India into England came to £12,670,000, English exports to India to £10,350,000. A balance of £2,250,000 in India's favour.

Newmarch goes on: if that were the whole state of the case, the £2,250,000 would have to be sent back to India in some form. But now the advertisements from the India House come in. The India House announces that it is prepared to grant drafts on the various presidencies in India to the extent of £3,250,000. (This amount was levied for the East India Company's London expenses and for the dividends payable to the stockholders.) And that does not merely liquidate the £2,250,000 which arose out of the course of trade, it leaves a surplus of £1,000,000. (1917.)

1922. Wood asks: so the effect of these India House drafts is not to increase the exports to India, but to diminish them by that same amount?

(That is to say, to reduce by that amount the need to cover imports from India by exports to India.) Mr Newmarch explains it by the fact that for this £3,700,000 the English import "good government" into India. (1925.) Wood, who as Minister for India knew very well the sort of "good government" the English imported, says rightly, and with irony. 1926:

1926. Then the export which, as you say, the India House drafts bring about is an export of good government, and not of produce.

England exports a great deal "in this way" - for "good government", and for capital invested in foreign countries. So it receives imports that are quite separate from the ordinary run of business: tributes, partly for exported "good government", partly as the revenue of capital invested in the colonies and elsewhere, tributes for which it pays no equivalent.

So it is clear that the rate of exchange is not affected if England simply eats these tributes up, without any counter-export. And it is equally clear that the rate of exchange is not affected if it invests these tributes again abroad rather than at home, productively or unproductively; if, say, it sends munitions to the Crimea with them.

Besides, in so far as imports from abroad enter into England's revenue - they must of course be paid for, either as tribute, where no equivalent is needed, or through exchange against these unpaid tributes, or in the ordinary run of trade - England can either consume them or invest them anew as capital. Neither of these makes any difference to the rates of exchange, and that is just what the wise Wilson fails to notice. Whether it is domestic or foreign product that forms a part of the revenue - the second case presupposing only the exchange of domestic products for foreign ones - the consumption of this revenue, productively or unproductively, changes nothing in the rate of exchange, though it does change the scale of production. What follows is to be judged on this basis.

1934. Wood wants to know from him what effect the dispatch of war supplies to the Crimea would have on the rate of exchange with Turkey. Newmarch answers:

Newmarch does not see how the mere dispatch of war stores would necessarily affect the rate of exchange, but the dispatch of precious metal would certainly affect it.

So here Newmarch distinguishes capital in the money form from other capital.

But now Wilson asks:

1935. If you arrange an export on a large scale of some article for which no corresponding import takes place,

(Mr Wilson forgets that as far as England is concerned very substantial imports do take place for which no corresponding export has ever been made, except in the form of "good government" or of capital previously exported for investment; in any case no import that enters into the regular movement of trade. But this import is in turn exchanged, say for American product, and the fact that American product is exported without a corresponding import changes nothing in the point that the value of this import can be consumed without any equivalent outflow abroad; it was received without a counter-export, and can therefore also be consumed without entering into the balance of trade.)

then you do not pay the foreign debt that you have contracted through your import.

(But if you have already paid for this import beforehand - by credit given abroad, for instance - then no debt is contracted by it, and the question has nothing at all to do with the international balance; it resolves into productive or unproductive expenditure, whether the products consumed in this way are domestic or foreign products.)

and therefore by this transaction you must affect the rate of exchange, since the foreign debt is not paid, because your export has no corresponding import. - That is true of countries in general.

Wilson's lecture amounts to the claim that every export with no matching import is at the same time an import with no matching export, since goods from abroad - imported goods, that is - also go into making the article that is exported. The assumption is that every such export rests on an unpaid import or produces one - that is, a debt to abroad. This is wrong, even apart from the two circumstances: 1. England has free imports, for which it pays no equivalent, part of its Indian imports for instance. It can exchange these for American imports, and export the latter without any counter-import; in any case, as far as value goes, it has exported only what cost it nothing. And 2. it may have paid for imports - American ones, say - that form additional capital; if it consumes these unproductively, as war munitions for instance, this creates no debt to America and does not affect the rate of exchange with America. Newmarch contradicts himself in 1934 and 1935, and his attention is drawn to it by Wood, 1938:

1938. If no part of the goods that are used in making the articles we export without any return coming back (war expenditure) comes from the country to which those articles are sent, how does that affect the rate of exchange with that country? Suppose the trade with Turkey is in its ordinary state of equilibrium; how is the rate of exchange between England and Turkey affected by the export of war stores to the Crimea?

Here Newmarch loses his composure; he forgets that he has already answered this same simple question correctly under no. 1934, and says:

Newmarch says that they have, it seems to him, exhausted the practical question, and are now entering a very elevated region of metaphysical discussion.

Wilson has yet another form of his assertion that any transfer of capital from one country to another affects the rate of exchange, regardless of whether that transfer is made in precious metal or in commodities. Wilson of course knows that the rate of exchange is affected by the rate of interest, and in particular by the relation between the interest rates in force in the two countries whose mutual rate of exchange is at issue. If he can show that an excess of capital in general — first of all of commodities of every kind, precious metal included — also helps determine the rate of interest, he is already one step closer to his goal: a transfer of a substantial part of that capital to another country must then change the rate of interest in both countries, and in opposite directions, and so, in the second place, also the rate of exchange between the two countries. - F. E.

Wilson now says this in The Economist, which he was editing at the time, 1847, p. 574:

Wilson, in The Economist, argued that an excess of capital like this — big stocks of every kind, precious metal among them — must inevitably bring with it not only low prices for commodities in general but also a lower rate of interest charged for the use of capital (1). Suppose there are goods on hand enough to see the country through the next two years. Command over those goods for a set period would then change hands at a far lower rate than if the stock would hardly stretch to two months (2). Every loan of money, whatever shape it takes, is only the passing of command over commodities from one person to another. When commodities are in abundance, then, the interest on money must be low; when they are scarce, it must be high (3). As commodities arrive more freely, sellers multiply faster than buyers; and the further the quantity surpasses what immediate consumption needs, an ever larger share must be held back for later use. In those conditions an owner will agree to sell for future payment or on credit on easier terms than if he were certain his whole stock would be wanted within a few weeks (4).

On sentence (1): a heavy influx of precious metal can happen at the same time as a contraction of production, and that is always the case in the period after a crisis. In the phase that follows, precious metal may flow in from the countries that mainly produce it; in that period imports of the other commodities are usually balanced by exports. In each of these two phases the rate of interest is low and goes up only gradually; we have seen why. This low rate could be explained everywhere without any working of any ‘large stocks of every sort’. And how is that working supposed to take place? A low price for cotton, say, lets the spinners make high profits. Why, then, is the rate of interest low? Certainly not on the ground that a high profit can be made with borrowed capital. Only and solely because, in the circumstances as they are, the demand for loan capital does not grow in proportion to that profit; that is, loan capital moves differently from industrial capital. What The Economist wants to prove is exactly the reverse: that the two movements are one and the same.

Sentence (2), once we cut the absurd assumption of a stock laid in two years ahead down to something that could make any sense, presupposes an overstocked commodity market. That would cause prices to fall. Less would have to be paid for a bale of cotton. It does not follow at all that the money for buying a bale of cotton would be cheaper to borrow. That depends on the state of the money market. If it is cheaper to borrow, that is only because commercial credit is in a state that leaves it less need to call on bank credit than usual. What floods the market is either means of subsistence or means of production. A low price for either of them raises the industrial capitalist’s profit. Why should that lower interest — unless through the opposition, rather than the identity, between an abundance of industrial capital and the demand for money accommodation?

The circumstances are of such a kind that the merchant and the industrialist are able to give one another credit more readily; through this easing of commercial credit, the industrialist and the merchant alike require less bank credit; the rate of interest can therefore be low. This low rate of interest has nothing to do with the influx of precious metal, although the two can go side by side, and the very same causes that produce low prices of imported articles may also produce the excess of precious metal coming in. If the import market really were overstocked, that would prove a fall in demand for imported goods, which would be inexplicable at low prices unless it followed from a contraction of domestic industrial production; but that in turn would be inexplicable with oversized imports at low prices. Nothing but absurdities, in order to prove that a fall in prices = a fall in interest. The two may exist side by side at the same time. But then they express the opposite directions in which industrial capital and loanable money capital move, not their identity.

On point (3), why the interest on money should be low when goods abound is no clearer after this further explanation. Suppose commodities are cheap: for a given quantity I now pay, say, £1,000 where before I paid £2,000. But perhaps I lay out £2,000 all the same, take twice as many goods for it, and enlarge my business by advancing the same capital — a capital I may have to borrow. I buy for £2,000 now as before. So my call on the money market stays the same, even though my demand on the commodity market rises as commodity prices fall. If that second demand falls instead — that is, if output does not grow as commodity prices fall, which would fly in the face of every law The Economist holds — then the demand for loanable money capital would drop, even though profit would rise; and this growing profit would in turn create a demand for loan capital. Low commodity prices may also stem from three causes. One is a lack of demand: the rate of interest is low here because production has been paralysed, not because commodities are cheap, since that cheapness only registers the paralysis. Another is supply outrunning demand. That may come from markets being overstocked and so on, which leads to crisis, and in the crisis itself it may go together with a high rate of interest. Or it may be that the value of commodities has fallen, so that the same demand is met more cheaply. In this last case, why should interest fall at all? Because profit grows? If the reason is that less money capital is needed to maintain the same productive or commodity capital, that would prove only that profit and interest stand in inverse proportion to one another. Whatever else, the general thesis The Economist lays down is false. Cheap money prices for commodities and a low rate of interest need not come as a pair. If they did, the poorest countries, where the money prices of products are lowest, would have the lowest rate of interest, and the richest, where the money prices of agricultural products are highest, the highest. By and large The Economist grants that a fall in the value of money leaves the rate of interest alone. £100 still brings in £105; and if the £100 is worth less, then the £5 is worth less as well. Whether the original sum gains value or loses it, the ratio stays the same. Looked at as value, a definite quantity of commodities equals a definite sum of money. If its value rises, it matches a larger sum; if it falls, a smaller one. At £2,000, 5 per cent = £100; at £1,000, 5 per cent = £50. None of this alters the interest rate. The one sensible element in it is simply that more money accommodation is wanted when £2,000 is needed to sell the same quantity of commodities than when £1,000 will do. Even so, what it shows here is only an inverse relation between profit and interest. For profit grows as the elements of constant and variable capital get cheaper, while interest falls. But the reverse can also be the case, and often is. Cotton, for example, can be cheap because there is no call for yarn and cloth; it can be relatively expensive because large profits in the cotton industry bring a large demand for it into being. Or conversely, the profits of the manufacturers can be high precisely because the price of cotton is low. Hubbard's list shows that the rate of interest and commodity prices perform movements wholly independent of one another, while the movements of the rate of interest keep exactly in step with those of the metal reserve and of the exchange rates.

‘Whenever, therefore, commodities are present in abundance, the interest of money must be low.’

So says The Economist. Precisely the opposite happens in crises: commodities are over-abundant, impossible to convert into money, and the rate of interest is therefore high. At another stage of the cycle, demand for commodities is great, so returns come easily; but commodity prices rise at the same time, and the interest rate is low because returns come easily. ‘When they’ — the commodities — ‘are scarce, the interest of money must be high.’ Once more the reverse occurs in the periods of slackness that follow a crisis. Goods are scarce in an absolute sense, not just measured against demand; and still the rate of interest is low.

That, on (4), a holder of commodities will sell off more cheaply when the market is overstocked — if he can sell at all — than when the stocks on hand look likely to be used up quickly, is fairly clear. It is less clear why the rate of interest should fall on that account.

If the market is overstocked with the imported commodity, the rate of interest may rise, from a greater demand for loan capital on the part of the owners, who want to avoid having to throw the goods onto the market. It may fall, because commercial credit is fluid and this still keeps the demand for bank credit relatively low.

The Economist notes how quickly the exchange rates responded in 1847 once the rate of interest was raised and further pressure was put on the money market. But one thing must not be forgotten: even after the rates turned, gold went on flowing out until the end of April. The turning-point only came at the beginning of May.

The Bank's metal reserve stood at £15,066,691 on 1 January 1847, when the rate of interest was 3 1/2 per cent. The three-month rates that day were 25.75 on Paris, 13.10 on Hamburg and 12.3 1/4 on Amsterdam. By 5 March the metal reserve had dropped to £11,595,535, the discount rate had climbed to 4 per cent, and the exchange rates had fallen to 25.67 1/2 on Paris, 13.9 1/4 on Hamburg and 12.2 1/2 on Amsterdam. Gold was still flowing out; see the table below.

Even after the exchange rates turned at the end of March, the drain of gold went on for a whole month longer — probably, it seems, to the United States.

The Economist of 1847 (p. 954) sets out how quick and striking the effect of a raised rate of interest was, and of the money squeeze that followed it, in correcting an unfavourable exchange rate and turning the flow of gold back so that it ran to England again. The paper's claim is that this effect was produced entirely independent of the balance of trade. A higher rate of interest, it says, brought about a lower price for securities, both English and foreign, and prompted large purchases of them on foreign account. That raised the total of bills drawn from England, while on the other side money was so hard to get at the high rate that demand for those bills fell away even as their number grew. From the same cause orders for imports were cancelled, and English investments placed abroad were realized and the money brought home to be employed here. So, the paper reports, the Rio de Janeiro Price Current of 10 May wrote that the exchange on England had suffered a further fall, caused mainly by pressure on the market for remittances of the proceeds of large sales of Brazilian government stock on English account. English capital that had been invested abroad in various securities, at a time when the rate of interest here was very low, was brought back in this way once the rate rose.

The balance of trade of England.

India alone has to pay around £5 million in tribute, for 'good government', and in interest and dividends on British capital, and that leaves out of account the sums sent home every year — partly by officials, out of savings from their salaries, partly by English merchants as a portion of their profits, to be invested in England. Every British colony has large remittances to make for the same reasons. Most banks in Australia, the West Indies and Canada were set up with British capital, and their dividends have to be paid in England. In the same way England owns many foreign state securities — European, North and South American — and receives the interest on them. On top of that comes its holding in foreign railways, canals, mines and so on, with the dividends that go with them. For all these items, the remittances go out almost exclusively in products, in addition to the total of English exports. What goes the other way, out of England to the owners of English securities and for the consumption of English people abroad, is vanishing by comparison.

In so far as the question concerns the balance of trade and the exchange rates, it is

The Economist observed that at any given moment it was a question of time. As a rule, the paper said, ... England grants long credits on its exports, while imports are paid for in cash. At certain moments this difference in usance has a significant effect on the exchange rates. When our exports are growing very substantially, as in 1850, British capital must be steadily invested abroad on a growing scale ... so remittances in 1850 can be set against goods sent out in 1849. But if exports in 1850 are 6 million above those of 1849, the practical result must be that more money has gone abroad by that amount than has come back during the year; and this in turn has its effect on the rates of exchange and on the rate of interest. When business is depressed by a crisis, on the other hand, and our exports are sharply limited, the remittances falling due from the larger exports of earlier years far outweigh the value of our imports; the rates turn in our favour accordingly, capital accumulates quickly at home, and the rate of interest drops. (The Economist, 11 January 1851.)

The foreign exchange rate can change:

First, through the momentary balance of payments, whatever the causes determining it may be: purely commercial causes, capital investment abroad, or state spending, as in wars and the like, in so far as cash payments are made abroad in connection with it.

Second, through a depreciation of a country's money, whether that money is metal or paper. This is purely nominal. If £1 now stood for only half as much money as it did previously, it would naturally be counted at 12 1/2 francs and not at 25.

Third, where the rate is between countries one of which uses silver as 'money' and the other gold, the rate of exchange depends on the relative movements in the value of the two metals, since these movements plainly shift the parity between them. An example of the last case was the rate in 1850: it stood against England even though England's exports rose enormously — and still no drain of gold took place. It resulted from the momentary increase in the value of silver relative to gold. (See The Economist, 30 November 1850.)

The par of exchange for £1 is: Paris, 25 francs 20 centimes; Hamburg, 13 banco marks 10 1/2 schillings; Amsterdam, 11 florins 97 cents.

To the same extent that the rate of exchange on Paris climbs above 25.20, it becomes more advantageous to the English debtor to France, or to the buyer of French goods. In both cases he needs fewer pounds sterling to reach his end. In more distant countries, where precious metal is not easy to obtain and bills are scarce and insufficient for the remittances to be made to England, the natural effect is that the prices of the products usually shipped to England are driven up, since a greater demand now arises for them, in order to send them to England instead of bills. This is often the case in India.

The exchange rate can turn against England, and gold can even flow out, while money there is extremely abundant, the rate of interest is low and securities are priced high.

During 1848 England took in large amounts of silver from India, because good bills were rare and middling ones were taken only reluctantly, owing to the 1847 crisis and the severe shortage of credit in the Indian trade. Hardly had this silver arrived than it found its way to the Continent, where the revolution set hoarding going in every corner. In 1850 the same silver largely made the journey back to India, since the state of the exchange rate now made this profitable.

*

The monetary system is Catholic at bottom; the credit system, Protestant at bottom. The saying goes that the Scotch hate gold. As paper, the money-existence of commodities is purely social. It is faith that saves. Faith that money value is the immanent spirit of commodities; faith in the mode of production and the order foreordained for it; faith that the individual agents of production are nothing but personifications of self-valorizing capital. But the credit system has no more freed itself from the basis of the monetary system than Protestantism has freed itself from the foundations of Catholicism.