About the close of 1842 the pressure, Avhich had crushed English industry almost without interruption since 1837, began to weaken. During the following two years the demand of the foreign countries for products of English industry increased still more. The year 1845 to 1846 marked the period of greatest prosperity. In 1843 the opium war had opened the doors of China to English commerce. The new market offered a convenient excuse for the further expansion of already extended industries, particularly of the cotton industry. " How can we ever produce too much? We have to clothe 300 millions of people." Thus spoke a Manchester manufacturer to the writer in those days. But all the newly erected factory buildings, steam engines, spinning and weaving machines did not suffice to absorb the surplus-value, which poured into them from Lancashire. With the same passion, which was exhibited in the expansion of production, the building of railroads was undertaken. Here the longing of manufacturers and merchants for speculation found its first satisfaction, as early as the summer of 1844. Stock was underwritten to the full extent possible, that is, so far as the money went to cover the first payments. The idea was that a way would be found in due time to get the missing amount. But when further payments were due (Question 1059, C. D.
1848-57, indicates that the capital invested in railroads in 1846-47 amounted to 75 million p.st.), it was necessary to resort to credit, and as a rule the actual business of the firm itself had to add its drop of blood.
In most cases the actual business was already overburdened.
480 Capitalist Production.
The enticing and high prices had misled people into far greater operations than the available cash justified. It was so easy, and cheap besides, to get credit. The bank discount was low. In 1844 it was If to 2|%, in 1845 until October it was less than 3%, then it rose for a little while to 5% (until February 1846), then it fell once more to 3^% in December 1846. The bank had in its cellars a supply of gold of unusual dimensions. All inland quotations stood higher than ever before. Why should a man let this fine opportunity pass by? Why shouldn't he go in for all he was worth? Why not send to the foreign markets, that longed for English goods, all the commodities that could be manufactured? Antl why should not the manufacturer himself pocket the doubla gain arising from the sale of yarn and fabrics to the Far East, and from the sale, in England, of the back freight received in their stead?
Thus arose the system of mass consignments, by virtue of advances, to India and China, and this soon developed into a system of consignments purely for the sake of getting advances, as described more at length in the following notes. This had to lead inevitably to an overcrowding of the markets and to a crash.
This crash came as the aftermath of a crop failure in 1846. England, and still more, Ireland, required enormous imports of means of subsistence, particularly of corn and potatoes. But the countries that supplied these things could be paid only to a very small degree in products of English industry. They had to be paid in precious metals. This took at least nine millions of gold to foreign countries. Of this amount of gold fully seven and a half millions came out of the cash treasury of the Bank of England, whose freedom of action on the money market was seriously impaired thereby. The other banks, whose reserves are deposited with the Bank of England, which reserves are practically identical with those of the Bank of England, were thus compelled to cut down their own money accommodations. The rapidly and easily flowing stream of payments became clogged, first here and there, then universally. The Ijankin^ discount, which had Credit and Fictitious CaHtal. 481 still been 3 to 3^% in January of 1847, rose to 7% in April, when the first panic broke out. Then a temporary lull came in summer, lowering this discount to 6^ and 6 %. But when the new crop failed likewise, the panic broke out afresh and more violently. The official minimum discount of the Bank rose in October to 1%, in November to 10%, in other words, the overwhelming mass of checks could be discounted only at outrageous rates of interest, or not at all. The general stopping of payments brought about the bankruptcy of sev-~ eral of the first firms and of very many medium-sized and small firms. The Bank itself was in danger of ruin from the shrewd Bank Acts imposing the limitations of 1814. In tliis emergency the government yielded to the universal demand and suspended these Bank Acts on October 25, thereby taking off the absurd legal fetters thrown around the Bank. Now the Bank was enabled to throw its supply of bank notes into circulation without any interference. The credit of these bank notes being practically guaranteed by the credit of the nation, and thus unimpaired, the shortness of money was immediately relieved in the most effective manner. Of course, quite a number of hopelessly caught large and small firms failed nevertheless even then, but the climax of the crisis had passed, the banking discount fell once more to 5% in September, and in the course of 1848 that renewed business activity was resumed, which took the edge off the revolutionary movements on the continent in 1849, and which inaugurated in the fifties a formerly unknown industrial prosperity and ended — in the crash of 1857.— F. E.]
I. A document issued by the House of Lords in 1848 gives information concerning the depreciation of government papers and bonds during the crisis of 1847. According to it the depreciation of October 23, 1847, compared to the stand of values in February of the same year, amounted to 93,824,-217 pounds sterling in English government bonds, 1,358,288 pounds sterling in dock and canal stock, and to 19,579,-820 pounds sterling in railroad stocks, a total of 114,762,325 pounds sterling.
II. With reference to the swindle in East Indian business, 2E 482 Capitalist Production.
in which it was no longer a question of making drafts, because commodities had been bought, bnt rather of buying commodities in order to be able to make out discountable drafts which should be convertible into money, the " Manchester Chiardian " of November 24, 1848, remarks that Mr. A in London instructs a Mr. B to buy from the manufacturer C in Manchester commodities for shipment to a Mr. D. in East India. B pays C in six-months-drafts to be made by C on B. B secures himself by six-months-drafts on A. As soon as the goods are shipped, and the bill of lading mailed, A makes out sixmonths-drafts on D. The buyer and shipper thus get possession of funds many months before the goods are actually paid for. And it was a common custom to renew the drafts when due under the pretense of allowing time for turn-over in such a protracted business. Unfortunately the losses in this bu'^iness did not lead to its restriction, but to its extension. In proportion as the interested parties grew poor their need of making purchases increased, in order to find in new advances a compensation for capital lost in previous speculations. Purchases were then no longer regulated by supply and demand, but became the most important feature in the financial operations of a shaky firm. But this is only one side of the picture.
What happened in the export of manufacturing goods here, occurred in the purchase and shipment of goods on the otlier side. Firms in India, which had credit enough to get their checks discounted, bought sugar, indigo, silk or cotton, not because the purchase prices as compared with the latest London quotations promised a profit, but because previous drafts on a London firm would soon be due and would have to be covered. What was simpler than to buy a cargo of sugar, to pay for it in ten-months-drafts on the London firm, and to send the bills of lading by overland mail to London? Less than two months later the bills of lading of these barely shipped goods, and thus the goods themselves, were pawned in Lombard Street, and the London house came into the possession of money eight months before the bills of exchange made out for these goods were due. And all this passed off smoothly, without interruption or difficulties, so long as the discounting firms found enough money to advance on bills of lading and dock warrants, and to discount the drafts of Indian firms on select firms of Mincing Lane to unlimited amounts.
Credit and Fictitious Capital. 483 [This fraudulent procedure remained in vogue so long as the goods from and to India had to sail around the Cape. But since they pass through the Suez Canal this method of creating fictitious capital has lost its foundation, thanks to steam navigation and the shortening of the trip. And when the telegraph reported the stand of the Indian market to the English and that of the English market to the Indian business man on the same day, this method was completely killed. F. E.]
III. The following is from the previously quoted report on Commercial Distress, 1847-48: In the last week of April, 1847, the Bank of England informed the Eoyal Bank of Liverpool, that it would henceforth reduce its discount business with the latter bank by one-half. This communication had a very disastrous effect, because the payments in Liverpool had lately been made far more in bills of exchange than in cash, and because the merchants, who ordinarily carried much cash money to the bank for the purpose of squaring their notes, had been able to bring only checks of late, which they had received themselves for their cotton and other products. This had assumed large proportions and caused the business difficulty. The endorsed checks, which the bank had to turn into cash for the merchants, had mostly been made out by outsiders, and had so far been balanced generally by the payments received for tho products. The checks which the merchants now brought in place of the former cash were bills of exchange for different lengths of time and of different kinds, a considerable number being bank checks for three months from date, the majority being checks for cotton. These bills of exchange, when bank checks, had been endorsed by London bankers, the others were endorsed by merchants in Brasilian, American, Canadian, West Indian, etc., business...The merchants did not draw on one another, but the customers in the home country, who had bought products in Liverpool, covered them by drafts on London banks, or drafts on other firms in London, or on drafts of some one else. The communication of the Bank of England caused a shortening of the running time of checks drawn against sales of foreign products, which used to run frequently longer than three months, The period of prosperity in England, from 1844 to 1847 was, as described above, connected with the first great rail- 484 'Capitalist Production.
road swindle. The above-named report makes the foliowiug statements concerning the influence of this swindle on business in general: In April, 1847, nearly all commercial firms had begun to starve their business more or less, by investing a part of their commercial capital in railroads (p. 41.) — Loans were also made by private parties, bankers and insurance companies at a high rate of interest, for instance, at 8% (p. G6). These large advances of these business firms to railroads caused them to take up in their turn too much capital from banks on discount checks, by which to carry on their own business (p. 67. — ■ (Question): Would you say that the payments on railroad stocks contributed much to the pressure which burdened the money market in April and October 1847? (Answer): I believe that they hardly contributed anything to the pressure in April. In my opinion they had rather strengthened than weakened the bankers going on into April, and perhaps even into the summer. For the actual employment of the money followed by no means as rapidly as the deposits; as a result most of the banks had a rather large amount of railroad stocks in their hands in the beginning of the year.
[This is corroborated by numerous statements of bankers in C. D. 1848-57.] This gradually melted away in summer and was considerably smaller on December 31. One cause of the pressure in October was the gradual decrease of the railroad funds in the hands of bankers; between April 22, and December 31, the balances of railroads in our hands were reduced by one-third. This effect was produced by railroad deposits in all of Great Britain; they have gradually stripped the banks of deposits (p. 43, 44). — Samuel Gurney (Chief of the illfamed firm of Overend Gurney & Co.) says likewise: In 184G there was a much greater demand for capital for railways, but it did not raise the rate of interest. There was a condensation of small sums into larger masses, and these larger masses were consumed in our market; so that on the whole the effect was to throw more money on the money market of the city, not so much to take it out.
A. Hodgson, Director of the Liverpool Joint Stock Bank, shows to what extent bills of exchange may form a reserve for bankers: It was our custom to hold at least nine-tenths of all our deposits, and all money received from our customers, in our bill books in the shape of bills of exchange, Credit and Fictitious Capital. 485 which fell due from day to day...so much so, that the amount of bills due da,ily during the time of the crisis almost equaled the amount of demands for payment made on us every day (p. 53).
Speculative Bills. — No. 5092. " By whom were the bills of exchange (against sold cotton) mainly endorsed?" — (R. Gardner, the cotton manufacturer mentioned several times in this work): " By produce jobbers; one trader buys cotton, transfers it to some jobber, draws checks on this jobber, and gets these bills discounted." — 'No. 5094. " And these bills of exchange go to the Liverpool banks and are discounted by them? " — " Yes, and also by others...Had not this accommodation existed, which was mainly allowed by the Liverpool banks, cotton would have been, in my opinion, from 1^ d to 2 d per pound cheaper last year." — No. 600. " You said that an enormous number of bills of exchange was in circulation, drawn by speculators upon cotton jobbers in Liverpool; does the same apply to your advances on bills of exchange for other colonial products than cotton? " — (A. Hodgson, banker in Liverpool): " It refers to all kinds of colonial products, but most particularly to cotton." — No. 601. " Do you, as a banker, try to keep away from bills of exchange of this sort? " — " Not at all; we regard them as legitimate bills when kept within moderate bounds...This sort of bills is often prolong-ued."
Swindle in the East Indian and Chinese Market, 1847. — Charles Turner (Chief of one of the first East Indian firms in Liverpool): " We all know the occurrences, which have taken place in the matter of business to Mauritius and similar businesses. The jobbers were accustomed to make advances on goods, not only after their arrival, for the covering of the bills of exchange drawn for these goods, which is quite in order, and advances on bills of lading...they have also made advances on the product before it had been shipped, and in some cases before it had been manufactured. Eor instance, I had, in one case in Calcutta, bought bills of exchange amounting to 6-7,000 pounds sterling; the proceeds of these goods went to Mauritius in order to assist in planting sugar there; the bills came to Enjrland, and more than half of them were protested; then, when the shipments of sugar finally arrived, by which these bills were to have been paid.
486 Capitalist Production.
it was found that this sugar had already been pawned to third parties, before it had been shipped, or even before it had been boiled (p. 78). Now the goods for the East Indian market must be paid to the manufacturer in cash; but this does not mean much, for if the buyer has some credit in London, he draws on London and discounts the drafts in London, where the discount is now low; he pays the manufacturer with the money so obtained...it takes at least twelve months before a shipper of goods to India receives his return shipment...a man with ten or fifteen thousand pounds sterling going into Indian business would secure credit from some London house to a considerable amount; he would give to this house 1% and draw on it with the understanding, tliat the proceeds of the goods sent to India are to be sent to this London house; but the tacit understanding on both sides is that the London house shall not have to make any advances of cash; in other words, the drafts are prolongued until the return shipments arrive. The bills of exchange are discounted in Liverpool, Manchester, London, some of them are held by Scotch banks " (p. Id). — No. 730. " There is a firm, which recently failed in London; the examination of its books revealed the following condition of affairs: Here is one firm in Manchester, and another in Calcutta; they opened a credit with the London firm for 200,000 pounds sterling; that is, the business friends of this Manchester firm, who sent consignments of goods from Glasgow and Manchester to the firm in Calcutta, drew on the London house up to the sum of 200,000 pounds sterling; at the same time the understanding was, that the Calcutta firm would also draw on the London finn up to the sum of 200,000 pounds sterling; these bills of exchange were sold in Calcutta, other bills of exchange were bought with the proceeds, and these were sent to London in order to enable the firm there to pay the first drafts made by the Glasgow or Manchester firm. In this way this firm sent bills of exchange amounting to 600,000 pounds sterling into the world." — No. 971. " At present, when a firm in Calcutta buys a ship's cargo (for England) and pays for it with its own drafts on its London correspondent, and when the bills of lading are sent here, these bills of lading are used immediately for the purpose of securing advances in Lombard Street; hence they have eight months time in which Credit and Fictitious Capital. 487 to make use of the money before their correspondents have to pay the drafts." — IV. In the year 1848 a secret committee of the Upper House was in session on an investigation of the causes of the crisis of 184Y. The testimony of the witnesses before this committee was not published, however, until 1857 (Minutes of Evidence, taken before the Secret Committee of the H. of L. appointed to inquire into the Causes of Distress, etc., 1857; quoted as C. D. 1848-57). Here Mr. Lister, the Director of the Union Bank of Liverpool, testified among other things to the following: 2444. " There was, in the spring of 1847, an unwarranted extension of credit...because business men transferred their capital from their business to railroads and nevertheless wanted to continue their business on the old scale. Every one thought probably at first that he could sell the railroad stocks at a profit and thus replace the money in the business. He found, perhaps, that this was impossible, and then secured credit in his business where he paid cash formerly. This gave rise to an extension of credit."
2500. " These bills of exchange, on which the banks that had accepted them incurred losses, were they bills mainly for corn or for cotton?...They were bills for products of all kinds, corn, cotton and sugar, and products of all sorts. There was at that time nothing, with the exception of oil, perhaps, that did not fall in price." — 2506. " A jobber, who accepts a bill of exchange, does not do so without being sufficiently secured, also against a fall in the price of the commodity which serves as a security."
2512. " Two kinds of bills of exchange are drawn for products. To the first kind belongs the original draft, which is made out on the other side on the importer...The drafts which are made out in this way for products are frequently due before the goods arrive. For this reason the iiierchant who has not enough money when the products arrive, must pawn them to some broker until he can sell them. Then a draft of the other kind is immediately drawn on the broker by the Liverpool merchant, on the strength of those products...it then becomes the business of the banker to ascertain, whether he has those goods and to what extent he has made advances on them. He must convince himself, 488 Capitalist Production.
that the broker has security, in order to make good eventual losses."
2516. "We receive also bills of exchange from foreign countries...Some one buys on the other side a bill of exchange on England, and sends it to some firm in England; we cannot tell by looking at this bill, whether it has been drawn reasonably or unreasonably, whether it represents products or wind."
2533. " You said that foreign, products of nearly all kinds are sold at a heavy loss. Do you believe, that this was due to unwarranted speculations in these products? " — " It arose from a very large import, while no adequate consumption existed to take care of it. From all indications the consumption fell off considerably." — 2537. " In October...products Avere almost unsaleable."
How it is tliat a general scramble for safety is made at the critical stage of a crisis is explained in the same report by an expert of the first order, the worthy and crafty Quaker, Samuel Giirney of Overend Gurney & Co.: 1262. " When a panic reigns, a business man does not ask himself, how profitably he can invest his bank notes, or whether he will lose 1 or 2% in the sale of his treasury notes or 3% bonds. Once that he is under the suggestions of fright, he cares nothing about gain or loss; he gets himself into a safe place, the rest of the world may do what it pleases."
V. Concerning the mutual unmasking of two markets Mr. Alexander, a merchant in the East Indian trade, testifies before the Committee of the Lower House on the Bank Acts of 1857 (quoted as B. C. 1857): 4330. " At present, if I invest 6 shillings in Manchester, I get 5 shillings back in India; if I invest 6 shillings in India, I get 5 shillings back in London." In this way the Indian market is exposed by England, and the English by India. And this took place in the summer of 1857, barely ten years after the bitter experience of 1847!
I Accumulation of Money-Capital. 489 CHAPTER XXVI.
ACCUMULATION OF MONEY-CAPITAL. ITS INFLUENCE ON THE RATE OF INTEREST.
" In England, a steady accumulation of additional wealth takes place, which has a tendency to assume ultimately the form of money. But next to the desire to acquire money, the most insistent desire is that of disposing of it by some kind of investment bringing interest or profit; for money as money does not bring wealth. Unless, therefore, a gradual and adequate extension of the field of investment takes place simultaneously with this steady accession of additional capital, we must be exposed to periodical accumulations of money seeking investment, which will be of greater or smaller importance according to circumstances. For a long series of years the national debt was the great means of absorbing the superfluous wealth of England. Since it reached its maximum in 1816 and no longer acts as an absorbent, every year a sum of at least 27 millions has been seeking other fields of investment. Moreover, various return payments of capital were made...Enterprises which require a large capital for their execution and make an opening from time to time for the excess of unemployed capital...are absolutely necessary, at least in our country, in order to take care of the periodical accumulations of the superfluous wealth of society, which cannot find room in the ordinary fields of investment." (The Currency Question Reviewed, London, 1815, p. 32.) Of the year 1845 the same work says: " Within a very short period the prices have leaped upward from the lowest point of depression...The 3% national debt stands almost at par...The gold in the vaults of the Bank of England exceeds all former amounts stored away there. Stocks of all kinds are quoted at prices, 490 Capitalist Production, which are unheard of in almost every case, and the rate of interest has fallen so much, that it is nearly nominal...All these are proofs that another heavy accumulation of unemployed wealth exists in England, that another period of speculative overheating is imminent." {Ibidem^ p 35.)
" Although the import of gold is not a reliable indication of profit in foreign commerce, nevertheless a part of this import of gold, in the absence of any other explanation, represents on its face such a profit." (J. G. Hubbard, The Currency and the Country, London, 1843, p. 41.) Take it that in a period of good steady business, profitable prices, and well supplied circulation of money, a crop failure gives rise to an export of 5 millions of gold and to an import of corn to the same amount. The circulation " (meaning, as we shall see immediately, the unemployed money-capital, not the medium of circulation. F. E.) "is reduced by the same amount. The private individuals may still possess means of circulation to the same amount, but the deposits of the merchants in the banks, the outstanding balances of the banks with their money brokers, and the reserves in their treasuries will all be reduced, and the immediate result of this reduction to the amount of the unemployed capital will be a rise in the rate of interest, say from 4% to 5%. Since business is sound, confidence is not shaken, but credit will be valued more highly."
(Ihidem, p. 42.) " If the prices of commodities fall universally, the superfluous money flows back to the banks in the form of increased deposits, the plethora of unemployed capital reduces the rate of interest to a minimum, and this condition of affairs lasts until either higher prices or a brisker business call the slumberi-ig money into service, or until it has been absorbed by investment in foreign securities or foreign commodities." (P. 68.)
The following extracts are once more taken from the parliamentarian report on Commercial Distress, 1847-57. — In consequence of the crop failure and famine of 1846—47 a heavy import of means of subsistence was necessary. " Hence a gi'eat excess of imports over exports...Hence a considerable drain of money from banks, and an increased Accuiniilation of Money-Capital. 491