But it is just the development of the credit and banking business, which tends on the one hand to press all moneycapital into the service of production (or what amounts to the same, to convert all money incomes into capital), and which on the other hand reduces the metal reserve to a minimum in a certain phase of the cycle, so that it can no longer perform the functions for which it is intended. It is the developed credit and banking system, which creates this oversensitiveness of the whole organism of the reserve below or above its average level is a relatively insignificant matter. On the other hand, even a very considerable drain of gold is relatively ineffective, unless it arises in the critical period of the industrial cycle.
In this explanation we have not considered the cases, in which a drain of gold takes place as a result of crop failures, etc. In this case the great and sudden disturbance of the equilibrium of production, whose expression this drain is, '"^ See, for instance, the ridiculous answer of Weguelin, who says that five millions of drained gold is so much capital less, and who attempts to explain in this way certain phenomena, which do not appear when the actual industrial capital is infinitely more raised or depressed in price, expanded or contracted. On the other hand, it is just as ridiculous to attempt to explain these phenomena directly as symptoms of an expansion or contraction of the mass of real capital (that is, the material elements of capital).
672 Capitalist Production.
requires no further explanation of its effects. These effects are so much greater, the more such a disturbance begins in a period, in which production works under high pressure.
We have also left out of consideration the function of the metal reserve as a security for the convertibility of the bank notes and as the cardinal point of the 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 transition from the credit system to the monetary system is necessary, as I have already shown in Volume I, chapter III, under the head of "Means of Payment." That the greatest sacrifices of real wealth are necessary, in order to maintain the metallic basis in a critical moment, has been admitted by both Tooke and Loyd-Overstone. The controversy turns merely around a plus or minus, and around the more or less rational treatment of the inevitable.^ ^^ A certain quantity of metal, insignificant compared with the total production, is admitted to be the pivotal point of the system. Hence its beautiful theoretical dualism, aside from the appalling demonstration of this character in its capacity as the pivotal point of crises. So long as enlightened bourgeois economy treats of " Capital " in its official capacity, it looks down upon gold and silver with the greatest disdain, considering them as the most immaterial and useless forms of wealth. But as soon as it treats of the banking system, everything is reversed, and gold and silver become capital par excellence, for whose preservation every other form of capital and labor is to be sacrificed. But how are gold and silver distinguished from other forms of wealth? Xot by the magnitude of their value, for this is determined by the quantity of labor materialised "" Newmarch, B. A., 1857, No. 1364: "The metal reserve in the Bank of England is in fact...the central reserve or the central metal hoard, on the basis of which the entire business of the country is carried on. It is so to say the cardinal point, around which the entire business of the country has to turn; all other banks in the country consider the Bank of England as the central treasury, or the reservoir, from which they have to draw their reserves of hard cash; and the effect of the foreign rates of exchange falls always precisely upon this treasury and this reservoir."
"' " Practically, therefore, both Tooke and Loyd would meet an excessive demand for gold by a premature limitation of credits by raising the rate of interest and reducing advances of capital. Only Loyd causes by his illusion inconvenient and even dangerous [legal] limitations and rules." {Economist, 1847, p. 1417.)
Preciotts Metals and Rates of Exchange. 673 ill them; but by the fact that they represent independent incarnations, exjDressions of the social character of wealth. [The wealth of society exists only as the wealth of private individuals, who are its owners. It shows its social capacity only in the fact that these individuals exchange the qualitatively different use-values mutually for the satisfaction of their wants. Under the capitalist production they can do so only by means of money. Thus the wealth of the individual is realised as a social wealth only by means of money. In money, in this thing, the social nature of this wealth is incarnated.— F. E.] This social existence assumes the aspect of a world beyond, of a thing, matter, commodity, by the side of and outside of the real elements of social wealth. So long as production is in a state of flux, this is forgotten. Credit, likewise, in its capacity as a social form of wealth, crowds money out and usurps its place. It is the faith in the social character of production, which gives to the money-form of products the aspect of something disappearing and ideal.
But as soon as credit is shaken — and this phase always appears of necessity in the cycles of modern industry — all the real wealth is to be actually and suddenly transfonned into money, into gold and silver, a crazy demand, which, however, necessarily grows out of the system itself. And all the gold and silver, which is supposed to satisfy these enormous demands, amounts to a few millions in the cellars of the Bank.112 In the effects of the gold drains, then, the fact that production as a social process is not subject to social control is strikingly emphasized by the existence of the social forai of wealth outside out of it as a separate thing. The capitalist system of production, it is true, shares this with former systems of production, so far as they rest on the trade with commodities and private exchange. But only in it does this become ajDparent in the most striking and gTotesque form of 11; " Ygy qyjtg agree that there is no other way to modify the demand for gold than by raising the rate of interest?" — Chapman, associate member of the great bill brokers' firm of Overend Gurney & Co.: "That is my opinion. If our gold falls to a certain point, the best we can do is to ring the alarm bell at once and tc say: We are on the decline, and whoever sends gold abroad, must do so at his own peril." — B. A. 1S57, Evidence No. 5057.
2Q 674 Capitalist Production.
the most absurd contradiction and nonsense, because, in tbe first place, production for tbe direct use of tbe producers is most completely abolished under tbe capitalist system, so tbat wealth exists only as a social process expressed by the interrelations of production and circulation; and in tbe second place, because capitalist production forever strives to overcome this metallic barrier^ tbe material and phantastic barrier of wealth and its movements, in proportion as tbe credit system develops, but forever breaks its head on this same barrier.
In tbe crisis the demand is made, tbat all bills of exchangG, securities, and commodities shall be simultaneously convertible into bank money, and this whole bank money consists of gold.
II. Tlie Bale of Exchange.
[Tbe barometer for tbe international movement of the money metals is the rate of exchange. If England has more payments to make to Germany than Germany to England, the price of marks, expressed in sterling, rises in London, and the price of sterling, expressed in marks, falls in Hamburg and Berlin. If this overbalance of monetary obligations of England toward Germany is not equalised, for instance, by overpurchases of Germany in England, the sterling price for marks on bills of exchange on Germany must rise to a point, where it will pay to send metal (gold coin or bullion) from England to Germany in payment of obligations, instead of sending bills of exchange. This is the typical course of things.
If this export of precious metals assumes a larger scope and lasts longer, then the English bank reserve is touched, and the English money market, with the bank of England at the head, must take precautionary measures. These consist mainly, as we have already seen, in tbe raising of tbe rate of interest. When the drain of gold is considerable, the money market is always difficult, that is, the demand for Precious Metals and Rates of Exchange. 675 loan capital in the form of money exceeds the supply by far, and tlie raising of the rate of interest follows quite naturally from this; the rate of discount fixed by the Bank of England corresponds to this condition and asserts itself on the market. However, there are cases, when the drain of metal is due to other than the ordinary combinations of business (for instance, to loans of foreign states, investment of capital in foreign countries, etc.), when the London money market in that respect does not justify such an effective raise of the rate of interest; in that case the Bank of England must first make money " scarce " by heavy loans in the " open market " and thus create artificially a condition, which justifies a raise of the rate of interest, or renders it necessary; a maneuver, which becomes from year to year more difficult for it. — How this raising of the rate of interest affects the rates of exchange, is shown by the following testimony before the Committe of the Lower House concerning bank legislation in 185Y (quoted as B. A., or B. C, 1857.)
John Stuart Mill: 2176. "When the business has become difficult...a considerable fall in the price of securities takes place...foreigners order the buying of railroad shares here in England, or English owners of foreign railroad shares sell them to foreign countries...to that extent the transfer of gold is avoided." — 2182. " A large and rich class of bankers and dealers in securities, by whom the equalisation of the rate of interest and the equalisation of the commercial barometric pressure between the different countries is generally accomplished...is always on the lookout for the purchase of securities, which promise a rise in price...the proper place to buy them will be tlie country which sends gold abroad." — 2183. " These investments of capital took place to a large extent in 1847, enough to reduce the drain of gold."
J. G. Hubbard, Ex-Giovernor, and since 1838 a Director of the Bank of England: 2515. " There are a large number of European securities...which have a European circulation in all the various money markets, and these papers, as 676 Capitalist Production.
soon as they fall by one or two per cent, in one market, are at once brought up in order to be transferred to markets, where their value has still maintained itself." — 2565. "Are not foreign countries considerably in debt to merchants in England? "—..." Very considerably." — 2566. " The collection of these debts might, tlierefore, suffice by itself to explain a very large accumulation of capital in England 'l " — " In the year 1847 our position w'as finally restored by our drawing a line through so and so many millions, which America and Russia formerly owed to England." [England owed these same countries at the same time " so and so many millions " for corn and did not forget to " draw a line " also through the greater portion of these by the bankruptcy of the English debtors. See the report on Bank Acts, 1857, in chapter XXX of this work.] — 2572. " In 1847 the rate of exchange between England and Petersburg stood very high.
When the government letter was issued, which authorized the Bank of England to issue bank notes without adhering to the legally prescribed limit of 1-1 millions [beyond the gold reserve], the condition was that the discount should be kept at 8%. At that moment, and at that rate of discount, it was a profitable business to have gold shipped from Petersburg to London and to lend it out after its arrival at 8% until tlie three months' bills of exchange should become due, whicli had been drawn against the sold gold."- — ■ 2573. " In all operationc with gold many points must be taken into consideration; it depends on the rate of exchange and on the rate of interest, at which money may be invested until the bills drawn against it become due."
III. Rate of Exchange with Asia.
The following points are important, partly because they show that England must take refuge to other countries, when its rate of exchange with Asia is unfavorable. These are countries, whose imports from Asia are paid by way of England. On the other part they are important, because Mr, Wilson makes once more the silly attempt here, to identify the effect of an export of precious metal on the rates of ex* Precious Metals and Rates of Exchange. 677 change with the effect of an export of capital in general upon these rates; the export being in either case not for the purpose of paying or buying, but of investing capital. In the first place it goes without saying, that whether so and so many millions of pounds sterling are sent to India in precious metals or railroad rails^ in order to be invested in railroads there, these are merely two different forms of transferring the same amount of capital to another country. And this is a form of transfer^ which does not enter into accounts of the ordinary mercantile businesses, and for which the exporting country expects no other returns than later on the annual revenue from the income of these railroads. If this export is made in the form of precious metal, it will exert a direct influence upon the money market and with it upon the rate of interest of the country exporting this precious metal, at least under the previously outlined conditions, if not necessarily under all circumstances, since precious metal is directly loanable money-capital and the basis of the entire moneysystem. This export also affects directly the rate of exchange. For precious metal is exported only for the reason and to the extent that the bills of exchange, say, on India, which are offered in the London money market, do not sufiice for the making of these extra payments. In other words, there is a demand for Indian bills of exchange which exceeds their supply, and so the rates turn for a time against England, not because it is in debt to India, but because it has to send extraordinary sums to India. In the long run such a shipment of precious metal to India must have the effect of increasing the Indian demand for British goods, because it indirectly increases the consuming power of India for European goods. But if tlie capital is shipped in the shape of rails, etc., it cannot have any influence on the rates of exchange, since India has no return payment to make for it. For the same reason this need not have any influence on the money market. Wilson seeks to establish the fact of such an influence by declaring that such an extra expenditure will bring about an extra demand for money' accommodation and will thus influence the rate of interest. This may 678 Capitalist Production.
be the case; but to maintain that it must take place under all circumstances is totally wrong. No matter whether the rails are shipped and laid on English or Indian soil, they represent nothing else but a definite expansion of English production in a definite sphere. To contend that an expansion of production, even to a large volume, cannot take place without driving the rate of interest higher, is absurd. The money accommodation may grow, that is, the amount of business transacted by operations of credit; but these operations may increase also while the rate of interest remains unchanged. This was actually the case during the railroad mania in England during the forties. The rate of interest did not rise. And it is evident, that, so far as actual capital, in this case commodities, are concerned, the effect on the money market ■will be just the same, whether these commodities are intended for foreign countries or for inland consumption, A difference could be discovered only in the case that the investment of capital on the part of England in foreign countries would have a restraining influence upon its commercial exports, that is, exports for which payment must be made in return, or to the extent that these investments of capital are general symptoms indicating the overstraining of credit and the beginning of swindling operations.
In the following Wilson asks questions and Newmarch answers them.
1786. " You said before, with reference to the silver demand for Eastern Asia, that in your opinion the rates of exchange with India are in favor of England, in spite of the considerable wealth of metal continually sent to Eastern Asia; have you any reasons for this? " — " To be sure...I find that the actual value of the exports of the United Kingdom to India amounted to 7,420,000 pounds sterling in 1851; to this must be added the amount of the bills of exchange of the India House, that is, the funds which the East Indian Company draws from India for the payment of its own expenses. These drafts amounted in that year to 3,200,000 pounds sterling; so that the total exports of the United Kingdom to India amounted to 10,620,000 pounds sterling. In Precious Metals and Rates of Exchange. 679 1855 the actual value of the exports of commodities had risen to 10,350,000 pounds sterling; the drafts of the India House were 3,700,000 pounds sterling; the total exports therefore 14,050,000 pounds sterling. For 1851, I believe, we have no means of ascertaining the actual value of the imports of commodities from India to England; but we have for 1854 and 1855. In 1855 the entire actual value of these imports of commodities from India to England was 12,670,000 pounds sterling and this sum, compared to the 14,050,000 pounds sterling, leaves a balance in favor of England, in the direct commerce between the two countries, amounting to 1,380,000 pounds sterling."
Thereupon Wilson remarks that the rates of exchange are also touched by the indirect commerce. For instance, the exports from India to Australia and ISTorth America are covered by drafts on London, and therefore affect the rate of exchange quite in the same way as though the commodities had gone directly from India to England. Furthermore, when India and China are taken together, the balance is against England, since China has continually heavy payments to make to India for opium, and England has to make payment to China, and the amounts go by this circuitous route to India. (1787, 1789. Wilson asks now, whether the effect on the rates of exchange will not be the same, no matter whether the capital goes out in the form of iron rails or locomotives, or in the form of metal coin. I^ewmarch gives the correct answer: The 12 million pounds sterling, which have been sent during the last years to India for railroad construction served to buy an annual income, which India has to pay at regular terms to England. So far as any immediate effect on the precious metal market is concerned, the investment of 12 million pounds sterling can exert any influence only to the extent that metal had to be sent out for an actual investment in money.
1797. Weguelin asks: " If no returns are made for these rails, how can it be said that they affect the rate of exchange? " — "I do not believe that that portion of the expenditure, which is sent abroad in the form of commodities, affects the 68o Capitalist Production.
stand of the rates of exchange...the stand of the rates between two countries is, one may say exclusively, affected by the quantity of the obligations or bills of exchange offered in opposition to them in another country; that is the rational theory of the rate of exchange. As for the shipment of those 12 millions, they were in the first place subscribed here; now, if the business were such, that these entire 12 millions would be deposited in cash in Calcutta, Bombay and Madras this sudden demand would strongly affect the price of silver, just as would be the case if the East India Company were to announce tomorrow, that it would increase its drafts from 3 millions to 12 millions. But one-half of these 12 millions is invested...in the purchase of commodities in England...iron rails and lumber and other materials it is an investment of English capital, in England itself, for a certain kind of commodities to be shipped to India, and that ends the matter." — 1798. Weguelin: "But the production of these commodities of iron and wood required for the railroads produces a heavy consumption of foreign commodities, and this could affect the rate of interest, could it not? " — " Assuredly."
Wilson thinks now, that iron largely represents labor, and that the wages paid for this labor largely represent imported goods (1799), and then he asks further: 1801. ^' But speaking quite generally: If the commodities, which have been produced by means of the consumption of these imported commodities, are sent out in such a way, that we do not receive any returns for them, either in products or otherwise, would not that have the effect of making the rates of exchange unfavorable for us? " — " This principle is exactly what happened in England during the time of the great railway enterprises [1845]. For three or four years in succession you invested 30 million pounds sterling in railroads and almost the whole in wages. You have maintained during three years in the construction of railroads, locomotives, cars, stations, a greater number of people than in all factory districts together. These people...expended their wages in the purchase of tea, sugar, liquor and other foreign com- Precious Metals and Rates of Exchange. 68 1 modities; these commodities must be imported; but it is certain that during the time that this great investment was being made, the rates of exchange between England and other countries were not materially disturbed. l\o drain of precious metal took place, on the contrary, rather an addition."
1802. Wilson insists that with a settled balance of trade and par rates between England and India the extra shipment of iron and locomotives " must affect the rate of exchange." Kewmarch cannot see it that way, so long as the rails are sent out as an investment of capital and India has no payment to make for them in one form or another; he adds: " I agree with the principle that no country can in the long run have an unfavorable rate of exchange with all countries, with whom it deals; an unfavorable rate of exchange with one country necessarily produces a favorable one with another." — Wilson retorts with this triviality: 1803. " But would not a transfer of capital be the same, whether the capital were sent in this form or that? " — " So far as an indebtedness is concerned, yes." — 1804. " Then, whether you send out precious metal or commodities, the effect of railroad construction in India on the market of capital here would be the same and would increase the value of capital just as though the whole had been sent out in precious metal? " If the prices of iron did not rise, it was certainly a proof that the " value " of the " capital " contained in the rails had not been increased. What is wanted is the value of moneycapital, of the rate of interest. Wilson would like to identify money-capital with capital in general. The simple fact is, primarily, that 12 millions for Indian railroads are subscribed in England. This is a matter which has nothing directly to do with the rates of exchange, and the destination of the 12 millions is also immaterial for the money market. If the money market is in good condition, it need not produce any effect at all on it, just as the English railroad subscriptions in 1844 and 1845 left the money market untouched. If the money market is already somewhat difficult, then the rate of interest might indeed be affected by it, but certainly only in an upward direction, and this would have a favorable effect 682 Capitalist Production.
for England on the rates of exchange according to Wilson's theory, that is, it would work against the tendency to export precious metal; if not to India, then to some other country, Mr. Wilson jumps from one thing to another. In question 1C02 the rates of exchange are supposed to be affected, in question 1804 the " value of capital," two very different things. The rate of interest may affect the rates of exchange, and the rates may affect the rat© of interest, but the rate of interest may be stable while the rates of exchange fluctuate, and the rates of exchange may be stable while the rate of interest fluctuates. Wilson cannot understand, that the mere form, in which capital is shipped abroad, should make such a difference in the effect, that is, that the difference in the form of capital should have such an effect, not to mention its money form, which runs very much counter to the enlightened economy. Newmarch answers Wilson's question onesidedly inasmuch as he does not point out that he has jumped so suddenly and without reason from the rate of exchange to the rate of interest. Newmarch answers question 1804 uncertainly and doubtfully: " No doubt, if 12 millions are to be raised, it is immaterial, so far as the general rate of interest is concerned, whether these 12 millions are to be sent out in precious metals or in materials. I believe, however " [a flne transition, this however, when he intends to say the exact opposite] " that this is not quite immaterial " [it is immaterial, but, however, it is not material] " because in the one case the six million pounds sterling would return immediately; in the other case they would not return so quickly. Therefore it would make some" [what definiteness!] "difference, whether the six millions were invested here at home or sent entirely abroad." What does he mean by saying that the six millions would return immediately? To the extent that the six million pounds sterling have been spent in England, they exist in rails, locomotives, etc., which are shipped to India, whence they do not return, and their value returns very slowly through a sinking fund, whereas six millions in precious metals may return very quickly in their natural form. To the extent that six millions have been spent in wages, they have been consumed; but Precious Metals and Rates of Exchange. 683 the money, in which they were paid, circulates in the coiintiy the same as ever or forms a reserve. The same is true of the profits of the producers of iron rails and of that portion of the six millions which makes good their constant capital. This ambiguous phrase of the return of values is used by ISTewanarch only in order to avoid saying directly: The money has remained in the country, and so far as it serves as loanable money-capital the difference for the money-market (aside from the possibility that the circulation might have swallowed more hard cash) is only this, that it is spent for the account of A instead of B. An investment of this kind, where the capital is transferred to other countries in commodities, not in precious metals, cannot affect the rate of exchange, unless the production of these exported commodities requires an extraimport of other foreign commodities, and this, at any rate, does not affect the rate of exchange with the country in which the exported capital is invested. This production is not intended to settle for this extra import. The same takes place in every export on credit, no matter whether it be intended for investment as capital or for ordinary purposes of commerce. Besides, such an extra import may also cause a reaction in the way of an extra demand for English goods, for instance, on the part of the colonies or of the United States.
Before that N^ewmarch said that owing to the drafts of the East India Company the exports from England to India were larger than the imports. Sir Charles Wood cross-examines him on this score. This excess of the English exports to India over the imports from India is actually due to imports from India, for which England does not pay any equivalent. The drafts of the East India Company (now of the British government) resolve themselves into a tribute levied on India. For instance, in 1855 the imports from India to England amounted to 12,670,000 pounds sterling; the English exports to India amounted to 10,350,000 pounds sterling; balance in India's favor 2,250,000 pounds sterling. " If the matter were exhausted with this, then these 2,250,000 pounds sterling 684 Capitalist Production.
would have to be remitted to India in some form. But then come the invitations from the India House. The India House announces that it is in a position to issue drafts on the different presidencies in India to the amount of 3,250,000 pounds sterling. [This amount was levied for the London exj)enses of the East India Company and for the dividends due to the stockholders.] And this liquidates not merely the balance of 2,250,000 pounds sterling, which arose in a business way, but gives besides a surplus of one million." (1917.)
1922. Wood: "Then the effect of these drafts of the India House is not to increase the exports to India, but to reduce them to that extent? " [He means to say to reduce the necessity of covering the imports from India by exports to India to the same amount.] Mr. ]S[ewmarch explains this by saying that the British export for these 3,700,000 pounds sterling a "good government" to India (1925). Wood, knowing very well the kind of " good government " exported to India by the British, having been Minister to India, replies correctly and ironically: 1926. "Then the exports, which, as you say, are caused by the India House drafts, are exports of good government, and not of commodities." — Since England exports a good deal " in this way " in the shape of " good government " and for investment of capital in foreign countries, things which are quite independent of the ordinary run of business, tributes which consist either in payment for " good government " or in revenues from capital invested in the colonies or elsewhere, tributes for which it does not have to pay any equivalent, it is evident, that the rates of exchange are not affected, when England simply consumes these tributes without making any exports in return for them. Hence it is also evident that the rates of exchange are not affected, when it reinvests these tributes, not in England, but productively or unproductively in foreign, countries; for instance, when it sends ammunition to the Crimea with them. Moreover, to the extent that the imports from abroad pass into the revenue of England — of cours», they must first have been paid, either in the form of tributes for which no equivalent return is made, or by exchanging things for these tributes be-