Karl Marx

Financial

[“Neue Oder-Zeitung” No. 233, 22 May 1855]

London, 19 May. According to the optimists of the local press, the English commercial crisis has run its course, and trade and industry are once more moving on an ascending line. The fact from which they draw this consoling conclusion is the
easing of the money market
. On the one hand, the
gold reserve
in the vaults of the Bank of England has increased; on the other hand, it has reduced
the rate of interest
. While the gold reserve on 20 January 1855 amounted to only £12,162,000, by 12 May 1855 it had risen to £16,045,000 – an increase of £3,883,000. The rate of interest, which stood at 5 per cent on 20 January 1855, was reduced by the Bank on 31 March to 4 1/2 per cent, and on 28 April to 4 per cent. However, the gentlemen have overlooked the fact that an accumulation of gold in the Bank’s vaults and a fall in the rate of interest can also have another cause than flourishing business – namely the
reverse
: commercial stagnation and the accompanying
decline in the demand for capital
. That the latter is the real cause this time is shown by the weekly tables published by the Bank of England. Only one must not, like those optimists, fix one’s gaze exclusively on two columns of these tables, the gold reserve and the rate of interest. One must compare two other columns – that of the
reserve notes
and that of the
discounted bills
. As is well known, the Bank of England is divided into two distinct departments: the Issue Department (Ausgabedepartement) and the Banking Department (Bankdepartement). The former we may call the
mint
of the Bank of England. Its entire business consists in fabricating notes. By Robert Peel’s Act of 1844 this note fabrication is legally restricted. The Bank may, that is to say, beyond the sum of fourteen million pounds sterling, which represents the capital owed to it by the state, issue no more notes than there is gold in its vaults. If, therefore, the Bank issues, say, 20 million pounds sterling in notes, £6 million in gold must be in its cellars. The business of the Bank’s Issue Department is confined to the minting and issue of notes regulated in this way. The total number of notes thus fabricated by it is transferred by it to the Banking Department, the actual bank, which does business with the public, like any other deposit and discount bank, and puts the notes into circulation by discounting bills, making advances on interest-bearing securities, paying out dividends to the state creditors, repaying deposits lodged with it, etc. Robert Peel made this fine invention of splitting the Bank of England into two mutually independent departments, together with that regulation of the amount of notes to be issued, because he imagined that in this way he could forestall all future money crises and, by an automatic mechanical law, adjust the paper circulation to the metal circulation. What the much-vaunted statesman overlooked was the not unimportant fact that his regulation regulates only the circulation between the Issue and Banking Departments, between two offices of the Bank of England, but by no means the circulation between the Banking Department and the outside world. The Bank’s Issue Department delivers to the Banking Department as many notes as it is legally allowed to fabricate, e.g. 20 million, if £6 million in gold is in its coffers. How many of these 20 million actually come into circulation, however, depends on the state of business, on the requirements and the demand of the commercial world. The remainder, which the Bank does not know how to utilise, and which therefore remains lying in the coffers of the Banking Department, figures in the Bank’s returns under the name of
reserve notes
.

If we have now seen that the Bank’s gold reserve increased by £3,883,000 from 20 January 1855 to 12 May 1855, we find that during the same period the amount of reserve notes rose from 5,463,000 to 9,417,000, i.e. by £3,954,000. The larger the amount of reserve notes, i.e. of notes remaining lying in the coffers of the Banking Department, the smaller the amount of notes actually circulating among the public. From the figure just given, however, it follows that simultaneously with the accumulation of gold in the Bank’s vaults the mass of notes circulating among the public has diminished. Whence this contraction of the circulation? Simply from the decline in traffic and the diminution of commercial transactions. There can be no doubt as to the correctness of this view, when we see from the same

Bank returns that the value of the bills discounted by it amounted to £25,282,000 on 20 January 1855, whereas on 12 May 1855 it had fallen to £23,007,000 – a decrease of £2,275,000. The value of the bills discounted by it is, however, the surest gauge of the volume of business transacted by the Bank with the commercial world. The result is even more striking when it is considered that on 28 April the Bank had reduced its rate of interest to 4 per cent, and was therefore offering its commodity – capital – 20 per cent cheaper than in last January. And [up to the present day,] from 28 April, when the Bank lowered the rate of interest in this way, to 12 May, the quantity of notes issued for bill discounting has fallen, instead of rising – proof that, under the present conjunctures, capital even at 4 per cent is too dear to find even the demand that it still found at the beginning of January at 5 per cent; proof that the fall in the rate of interest is to be ascribed not to a greater inflow of capitals, but only to the smaller demand for commercial and industrial undertakings; proof, finally, that the increase of the metal reserve in the cellars of the Bank is only the increase of idle and, at this moment, unemployable capital.