Karl Marx

[New-York Daily Tribune, No. 5409, August 3, 1858, leading article]

It will be remembered that in 1857 the British Parliament was convened as a result of the suspension of the Bank Charter Act, which the Prime Minister and the Chancellor of the Exchequer had ordered on their own responsibility by letter of 12 November, when the money panic was in full swing. Once the Indemnity Bill had been passed, Parliament adjourned and left behind a select committee with the task of “inquiring into the operation of the Bank Acts of 1844 and 1845, as well as the causes of the recent commercial crisis”. The committee had actually been sitting since the beginning of 1857 and had already published two thick volumes, one volume of evidence and an ‘Appendix’, both dealing with the operation and effects of the Bank Acts of 1844 and 1845. Their labours had almost fallen into oblivion, when the event of the commercial crisis revived the committee and provided it with “additional material for investigation”. In the two thick volumes we mentioned, trade was declared “sound” and “secure” just two months before its colossal collapse. As to the operation of Sir Robert Peel’s Bank Act, Lord Overstone expressed himself before the committee on 14 July 1857 in a dithyrambic manner:

“Through strict and faithful adherence to the Act of 1844,” he said, “everything has proceeded with regularity and ease, the monetary system is secure and unshaken, the prosperity of the country is undisputed, public confidence in the Act of 1844 gains strength daily. If the committee wishes further practical proof of the soundness of the principles on which this Act rests, and of the beneficial results which it has secured, the true and sufficient answer to the committee is: Look around you; look at the present state of business in our country, look at the contentment of the people; look at the wealth and prosperity of all classes of society; and then, after this has been done, the committee will be able to decide whether it wishes to prevent the continuance of an Act under which such results have been achieved.”

The same committee had to congratulate the government six months later on the suspension of this very Act!

The committee numbered among its members no less than five Chancellors of the Exchequer or former Chancellors of the Exchequer, namely: Mr Disraeli, Sir G. C. Lewis, Mr Gladstone, Sir Charles Wood, and Sir Francis Baring, assisted by Mr Wilson and Mr Cardwell, two men long accustomed to furnish ideas to finance ministers. In addition, there were all the most eminent representatives of the English bureaucracy. In fact, the committee had about two dozen members, and was a remarkable conclave of financial and economic wisdom. The questions to be decided were: first, the principles of the Bank Act of 1844; second, the influence on commercial crises of the issue of bank notes payable on demand, and finally, the general causes of the present crisis. We intend to give a brief survey of the answers given to these various questions.

Sir Robert Peel, the parliamentary godfather, and Lord Overstone, the intellectual father of the Act of 1844, which prohibited the Bank of England from issuing notes beyond the amount of £14,500,000 except against cover in bullion, flattered themselves that they would have prevented such times of pressure and panic as had periodically occurred from 1815 to 1844. In the course of ten years their expectations have been disappointed twice, despite the extraordinary and unexpected aid which the operation of the Act received from the great gold discoveries. As appears from the evidence given before the committee, the panics of 1847 and 1857 were even more violent and destructive than any previous ones. Twice, in 1847 and 1857, the government had to transgress the Bank Act in order to save the Bank and the financial world revolving around it.

The committee, it seems, was faced with a very simple alternative: either the periodic violation of the law by the government was right, then the law must be wrong, or the law was right, then the government must be forbidden to interfere arbitrarily. What is one to say to the fact that the committee managed to advocate simultaneously the continuance of the law and the periodic recurrence of its violation? Laws are usually designed to limit the absolute power of a government. Here, on the contrary, the law seems to be maintained in order to preserve to the executive the absolute power to override it. The government letter authorising the Bank of England to meet demands for discount and advances on approved good securities beyond the limits prescribed by the Act of 1844 was issued on 12 November; and up to the 30th, the Bank had to throw into circulation daily on an average about half a million notes beyond the legal limit. By 20 November the unlawful surplus circulation had risen to about one million. What further proof is needed of the senselessness and uselessness of Sir Robert Peel’s attempt to “regulate” the circulating medium? The committee is quite right when it states “that no system of circulation can protect a commercial country against the consequences of its own folly”. This wise remark, however, does not hit the point. The question was rather whether the money panic, which constitutes only a phase of the commercial crisis, is artificially intensified by legislative measures or not. In justification of the Bank Act, the committee says:

“Undoubtedly the main object of the legislation in question was to secure that the variations of the note circulation in the kingdom should conform to the laws by which a metallic circulation would vary. No one denies that that object has been effected.”

We remark on this first that the committee declines to express an opinion on the laws by which a metallic circulation tends to vary, as it feared “it would not be able to arrive at any conclusion without great differences of opinion”. According to the bullionists, led by Sir Robert Peel, a purely metallic circulation would contract or expand according to the state of the exchanges; i.e., gold would flow in when the exchange was favourable, and flow out when it was unfavourable. In the former case, the general level of prices would rise; in the latter, it would fall. Now, if one assumes that such violent price fluctuations are inherent in a purely metallic circulation, then Mr J. S. Mill was certainly right when he stated before the committee that the condition to be attained in a note circulation was not that of imitating such calamitous fluctuations, but of correcting and overcoming them.

But the premises from which the bullionists start in their argument have proved to be imaginary. In countries where there are no credit transactions and consequently no note circulation, as was the case to a certain extent in France until recently, and is still the case to a much greater extent in Asia, private hoards of gold and silver are accumulated everywhere. If bullion leaves the country as a result of an unfavourable exchange, these hoards open up through an increase in the rate of interest. When the exchange turns, the hoards re-absorb the surplus of bullion. In no case does a vacuum or the contrary arise in circulation. The outflow and inflow of bullion affects the state of the hoards, but not the state of the circulating medium, and therefore no effect whatever is exerted on the general level of prices. What, then, does the committee’s defence amount to? That the Bank Act of 1844 leads, in times of pressure, to sudden price fluctuations, which, as the committee falsely assumes, would take place on the basis of a purely metallic circulation. But at least, says the committee, the convertibility of bank notes has been secured by Sir Robert Peel’s Act, which is the first duty of a bank, and it adds:

“The reserve held in the vaults of this establishment under the provisions of the Act of 1844 is greater than ever existed before in times of pressure. During the crisis of 1825 the bullion reserve fell to £1,261,000, in 1837 to £3,831,000, and in 1839 to £2,406,000; whereas the lowest point to which it has sunk since 1844 was £8,313,000 in 1847 and £6,080,000 in 1857.”

Above all, the convertibility of bank notes was maintained in all these panics, not because the Bank had sufficient bullion to redeem its notes, but simply because no demand for gold payment was made upon it. In 1825, for example, the Bank resisted the run for payment by the issue of £1 notes. If the comparatively larger bullion reserves in 1847 and 1857 are regarded simply as effects of the Act of 1844, one must also on the same grounds ascribe to this Act the fact that, despite California and Australia, the bullion reserves in 1857 were more than £2,000,000 below the level of 1847. And although it held two or three times the amount of gold as compared to 1825 and 1836, the Bank of England hovered on the brink of bankruptcy in 1847 and 1857, thanks to the provisions of Sir Robert Peel’s Bank Act. According to the evidence of the Governor of the Bank, the entire reserve of the Bank on 12 November 1857, the day when the Treasury letter came out, was only £580,751, while its deposits at the same time amounted to £22,500,000, of which almost £6,500,000 belonged to London bankers.

Without the Treasury letter, the shop would have had to be closed. To raise or lower the rate of interest—and the Bank admits that it had no other means of influencing the circulation—is a measure which was resorted to before the passing of the Act of 1844 and which naturally could also have been resorted to after its suspension. But, says the Bank, the directors would like their dignity to be fortified by the Act, and it would be inappropriate to “leave them to their own irresistible wisdom and resolution”. In normal times, when the Act is notoriously a dead letter, the directors would like to be fortified by the fiction of its legal operation, and in times of pressure, the only times when it operates at all, they want it suspended by a government decree.

Written on 6 June 1858. From the English.