Wednesday, 23 April 2014

Capital II, Chapter 16 - Part 2

In the previous chapter, Marx disregarded the fixed capital. In this chapter, he also disregards the circulating constant capital, to focus on the variable capital. That is reasonable because, although materials can form a productive supply, i.e. a stock of materials held in a firm's stores waiting to be used, they are only actually advanced as productive capital, as part of the labour process itself. Consequently, in analysing the turnover of productive capital, it is only that capital so advanced that can be considered i.e. the circuit P...P. Here, the circulating constant capital is advanced, is processed, and is turned over coincidentally with the labour-power that processes it.

From the assumptions set out earlier, we have a total annual product of £25,000. The advanced capital turns over 10 times. The variable capital is £500, and so the amount of the annual product attributable to labour-power is £500 x 10 = £5,000.

In establishing the principles for analysing the turnover of the capital, surplus value had also been left out of the equation. Now, Marx introduces it into the analysis.

With a 100% rate of surplus value, £100, or 1 week of labour-power, produces £100 of surplus value. In a working period of 4 weeks, £400 is produced, and in a 50 week year, £5,000 of labour-power produces £5,000 of surplus value.

But, its clear why the rate of turnover is important here. The firm has spent £5,000 on wages, in the year, but to achieve this, it only had to advance £500 of capital. The other £4,500 of wages paid during the year came not from an advance of capital, but merely from the capital advanced being returned in the sale of the commodity, and laid out once more to buy replacement labour-power. The firm did not need £5,000 of capital to start business, to cover wages, but only £500.

Yet, from the £500 of capital advanced, to buy labour-power, that labour-power has created £5,000 of surplus-value. In other words, the annual rate of surplus value is not 100% but 1000%!

“If we analyse this rate more closely, we find that it is equal to the rate of surplus-value produced by the advanced variable capital during one period of turnover, multiplied by the number of turnovers of the variable capital (which coincides with the number of turnovers of the entire circulating capital).” (p 299)

So, the annual rate of surplus value is s x n/v, where v is the amount advanced for variable capital, s is the surplus value produced by it for the period advanced, and n is the number of times v is turned over in a year.

Similarly, the total amount of surplus value produced in a year, S, = v x (r/100)/ n, where r is the rate of surplus value. For example, £500 x 100/100 x 10 = £5,000.

Marx labels this first variable capital A. He then assumes another variable capital, B, of £5,000. That is ten times that of A. This capital is expended at the rate of £100 per week to buy labour-power, just as with A. This labour-power is exploited at exactly the same rate as A. So, each week, the £100 advanced for labour-power, produces £100 of surplus value, as did A. The difference here is that the product of B can only be sold at the end of the year. Consequently, instead of the advanced capital being repeatedly returned, so as to be laid out again, this capital turns over just once during the year.

In order to keep producing during the year, and even though only the same amount of labour-power is employed and exploited, B has to be £5,000 as opposed to £500 for A.

In a year, B has produced exactly the same amount as A, £25,000. B has produced exactly the same amount of surplus value as A, £5,000. The capital laid out in wages, for B, is exactly the same as for A, £5,000, and for materials too, £20,000. Yet, the annual rate of surplus value for B is only a tenth that of A. S £5,000 x n = 1/ v £5,000 = 100%.

“This phenomenon creates the impression, at all events, that the rate of surplus-value depends not only on the quantity and intensity of exploitation of the labour-power set in motion by the variable capital, but besides on inexplicable influences arising from the process of circulation. And it has indeed been so interpreted, and has — if not in this its pure form, then at least in its more complicated and disguised form, that of the annual rate of profit — completely routed the Ricardian school since the beginning of the twenties.” (p 301)

But, the reason is obvious. A required an advance of capital of only £500 whereas B required an advance of capital ten times the size, of £5,000. If B had been advanced on the same basis as A, then the rate of surplus value would be the same. But, then we would have £5,000 advanced for 5 weeks = £1,000 per week = £50,000 per year. The surplus-value would be £50,000.

“Only the capital actually employed in the labour-power produces surplus-value and to it apply all laws relating to surplus-value, including therefore the law according to which the quantity of surplus-value, its rate being given, is determined by the relative magnitude of the variable capital.” (p 301)

Tuesday, 22 April 2014

Capital II, Chapter 16 - Part 1



Assume we have a circulating capital of £2,500 - £2,000 Constant Capital and £500 Variable Capital. The working period is 4 weeks, and circulating period 1 week, giving a turnover period of 5 weeks.


Capital 1
Capital 2
Total
Constant Capital
1600
400
2000
Variable Capital
400
100
500
Total
2000
500
2500

£500 per week is laid out. Over 50 weeks that equals 50 x £500 = £25,000.

The total capital advanced = £2,500, so the number of turnovers is 25000/2500 = 10. Both the variable capital and the circulating constant capital can only function when their entire value has been realised in the commodity, transformed into money-capital and used to buy new materials and labour power.

It is this which distinguishes this circulating capital from the fixed capital. The fixed capital, transfers a portion of its value, as wear and tear, which, like the circulating capital, is circulated by the commodity. But, unlike the circulating capital, the fixed capital continues to function in the labour process, without the need for all of its value to be reproduced, and thrown back into it.

The value, circulated by the commodity, includes that created by the labour-power, that transferred from the materials and from the wear and tear of the fixed capital. The money-capital realised in its sale goes in different directions. A portion is hoarded to cover wages for the next working period; a portion may be laid out to buy materials, some of which then form a productive supply; and another portion may form a hoard built up to replace fixed capital when it is worn out.

Monday, 21 April 2014

Marx and Engels' Theories of Crisis - Part 88

Crises Analysis– 1847, 1857, 2008, 20?? (8)

c) 2008 - continued


The expansion of debt, described in Part 87, had two aspects. Firstly, as the fall in global commodity values proceeded, the expansion of credit led to a fall in the value of money tokens, which prevented the fall in values being manifest as a global deflation of commodity prices. But, this same process, led to an unprecedented inflation of financial asset prices. Between 1982 and 2000, the Dow Jones Index rose from 1,000 to 10,000, a percentage rise way in excess of the growth of the US economy during that period. Similar rises took place in other stock markets, and bond markets. In addition, property markets, in several countries, experienced the same kind of bubbles. The bubbles in these asset markets were, in turn, the unsafe collateral on which individuals were encouraged to take on even more unsustainable levels of debt. 

Secondly, these growing levels of debt were the means by which the increasing gap between the exports of the US and UK to Asia, and their imports from Asia, was bridged. China and other Asian economies produced masses of cheap commodities, a large proportion of which were sold to the US and UK. These commodities contained large large amounts of produced surplus value, but to realise it, US and UK consumers had to buy those commodities, despite stagnant or falling real wages. They did so by taking on ever larger levels of debt, collateralised on increasingly outrageous valuations of their houses, shares and bonds.

The credit was provided in large part by those same Chinese and Asian producers, who recirculated the dollars they received into the purchase of US and UK bonds. In doing so, they ensured that they could continue to sell their commodities into these economies. This situation described in Part 74 is similar to that described by Marx in Capital III in relation to that in the 19th Century, concerning China and India, except the situation is reversed. Then, Mill and Ricardo etc. argued that Britain was not overproducing, but China and India were under-consuming. So, Britain forced its loans on China so that it could continue to consume British exports. Today, no one is forcing Britain or the US to borrow from China, but the end result is the same. Chinese over production is allowed to continue for so long as the loans keep flowing to finance the consumption. At some point, when the flow of profits declines, so that the supply of money-capital declines relative to its demand, then global interest rates will rise. 

When interest rates rise, borrowers default. When borrowers default, lenders also go bust and become loathe to lend. But, those who have borrowed to consume can no longer continue to do so. The producers of the commodities they bought from now find their market has dried up, and their overproduction becomes manifest. Nor can Central Banks remedy this situation of insolvency by printing money. Marx says,

“Ignorant and mistaken bank legislation, such as that of 1844-45, can intensify this money crisis. But no kind of bank legislation can eliminate a crisis.”


In a system based on credit, a crisis must occur when its not available. Bills represent sales, and purchases,

“whose extension far beyond the needs of society is, after all, the basis of the whole crisis.” 

In a message to today's politicians and central bankers, he continues,

“The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values.”

“Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production.”

Once the mass of potential money-capital begins to fall relative to its demand, the consequent rise in interest rates cannot be reversed by increased money printing, because under these conditions, the devaluation of the currency simply results in inflation. Suppliers of money-capital then demand even higher rates of interest to compensate. But, this is to get ahead of ourselves.

Sunday, 20 April 2014

Marx and Engels' Theories of Crisis - Part 87

Crises Analysis– 1847, 1857, 2008, 20?? (7)

c) 2008


The background to the financial crisis of 2008 has been described earlier, in examining the post-war slump that ran from around 1974 to 1999. As was seen, that period of crisis and stagnation was fully explicable in terms of Marx and Engels' theories of crisis.

The period of post-war boom led to the frequent kind of cyclical crisis, in which capital is over produced, as a result of exuberance, based on high rates of profit and strong demand. The development of new technologies led to the creation of a series of new industries, into which capital could flow. As each crisis was resolved, the boom continued and the accumulation of capital went on apace.

“On the other hand, new lines of production are opened up, especially for the production of luxuries, and it is these that take as their basis this relative over-population, often set free in other lines of production through the increase of their constant capital. These new lines start out predominantly with living labour, and by degrees pass through the same evolution as the other lines of production. In either case the variable capital makes up a considerable portion of the total capital and wages are below the average, so that both the rate and mass of surplus-value in these lines of production are unusually high.” (Capital III, Chapter 14)

But, this period gave way to a period of stagnation in the 1980's and 90's. During this period, the potential for establishing new, high-value/high profit industries is limited. This limits, therefore, the potential for capital accumulation, which is the basis of the stagnation. This is more pronounced in developed economies such as the US and UK, because industrial capital, in search of higher rates of profit, in existing industries, begins to relocate to a number of low wage economies, in Asia, where a combination of high levels of productivity, resulting from the capital intensive nature of production, with low wages, results in a high rate of surplus value, and higher rate of profit than possible in developed economies.

This results in a rapid industrialisation of a number of these Asian Tigers, and in particular, China, alongside the de-industrialisation of the economy in the US and UK. In these two economies, in particular, political decisions of their conservative governments, tied historically, sociologically and electorally to the petit-bourgeoisie, the small capitalists, and to the landed and financial oligarchy, encourage this process.

This is the situation Marx describes in Capital III, Chapter 20, where he sets out the way that the predominance of Merchant Capital (in which he includes money-dealing capital) always leads to such backwardness, compared to where industrial capital predominates.

“On the contrary, wherever merchant's capital still predominates we find backward conditions. This is true even within one and the same country, in which, for instance, the specifically merchant towns present far more striking analogies with past conditions than industrial towns.”

Capital III, Chapter 20

It connects up, Marx says with those other throwbacks, the landed and financial oligarchy. The centre for such interests is London, and it is in London, and its environs that the support for these reactionary policies pursued by the Tories is greatest, whereas in the rest of the country support for the Tories is much lower.

Instead of a social-democratic strategy, such as that followed in Germany, of seeking to move industrial capital away from these old, low-profit industries into newer high value/high profit industries, capable of sustaining higher wages on the basis of high levels of productivity, and the use of complex labour, these governments instead fell back on to a 19th century strategy of trying to extract absolute surplus value, on the basis of low wages, that could now be imposed after costly battles had led to the defeat of the workers, and the weakening of their organisations. But, for all the reasons Marx and Engels described, in relation to the limitations of extracting absolute surplus value, this strategy was never likely to be successful in the longer-term.

As described in those sections, one consequence of this, and the solutions adopted, in these economies, was that large amounts of money tokens, and credit-money was produced. In the global economy, the shift of production to Asia had caused the value of many commodities to fall drastically. This was intensified in the 1990's, as new technologies began to be introduced, which raised productivity, and also significantly reduced the turnover time of capital. Both brought a sharp rise in the rate and mass of profit. In so far as capital flowed into some of these new technology industries in the developed economies, particularly in the US, their own high value/high profit production led to rapid growth for a number of companies.

The growth in the mass and rate of profit from the late 1980's onwards was so huge, however, that even after creating whole new economies in Asia etc., and whole new industries in the area of technology, the supply of money-capital exceeded its demand for conversion into productive-capital. It pressed down, therefore, on global money markets, on interest rates, in the way Marx describes. global interest rates fell almost continuously from 1982 until 2012, at first because the demand for capital was low, and then because its supply was high.

This combination of low interest rates, caused by a rising mass of profit, and a devaluation of currencies resulting from the expansion of credit, was the basis for expanding aggregate demand in the UK and US as real wages stagnated or fell. A central plank was the deregulation of financial markets in the late 1980's, introduced by Thatcher and Reagan, that encouraged more and more people to go into debt, and removed all controls from the banks and finance houses that lent to them and who then gambled, via a series of derivatives, over how many of these debts would actually go bad.

Saturday, 19 April 2014

May's Elections Will Be The High Point Of The European Right

In the upcoming elections, to the European Parliament, in May, the Right and Far Right will do very well. In Britain, UKIP are likely to come second to Labour, beating even an increasingly conservative and euroseptic Tory Party into third place. The Liberals, particularly after Clegg's abysmal performance against Farage, are likely to be annihilated. It could even spell an early bath for Clegg if not for the Coalition.

In France, the Front National may even top the poll. It has sought to shed its neo-fascist image, to present itself as merely an extreme nationalist party, similar to UKIP. Yet, the history of many of the members of both parties – the BNP has openly admitted encouraging its members to join UKIP – and the underlying racism of both parties, remains.

Similar Far Right parties in the Netherlands, in Austria, Finland and elsewhere look set to benefit from the nationalist bandwagon that short-sighted policies of austerity have generated across Europe. As living standards have dropped, and services been cut, as a result of those policies, the usual scapegoat of foreigners – be it EU bureaucrats, or immigrants – has formed an easy target, facilitating the message of the Far Right.

But, in many ways, all this gives a false picture. The main reason these Far Right parties will do well is that the turnout, in the EU elections, will be low. It is the same reason UKIP, and even the BNP, did well in the last Euro elections. Its why they tend to do well in local elections, where the turnout is usually less than 30%.

Even where UKIP have done relatively well in by-elections, their actual share of the vote, for a normal General Election, has not been that significant. They have done well, in Labour constituencies, only to the extent that the Tories have done appallingly. Compared to the Labour vote, they have continued to lag well behind.

No one seriously believes that in a General Election, Farage and his circus of “loonies, fruitcakes and closet racists” will even win one seat let alone pose any significant chance of winning. The most likely effect will be to take sufficient votes from the Tories to let Labour win. Look at the experience of the BNP. It held many council seats, won in small turnout elections, in the same way it won its Euro seats. Today, it's a busted flush. In the General Election, it went backwards; it lost most of the council seats it had; it's bankrupt politically and financially.

Even the most successful of the Far Right parties, the FN in France, has no chance of winning the Presidency or a majority in the National Assembly. It benefits from the semi-proportional representation system in France, as did the BNP and UKIP in the last Euro elections. But, the success of the Far Right in the euro elections is likely to be part of their undoing. When Jean Marie Le Pen managed to get into the final round of Presidential elections, several years ago, the response of the establishment was to muster against him, in favour of Chirac.

The same could be seen in relation to the BNP, at its height, and to an extent today with Farage – though in part he has been a media created figure in his own right. Capital, particularly big capital, has no need of these Far Right, and certainly not fascist or neo-fascist parties, at the moment. In fact, after their experiences with Hitler in the 1930's, they are likely to have a high watermark before they resort to such measures again.

The Far Right represent a destabilising force that capital does not need when it is secure in its position, entrenched within resilient bourgeois social-democratic regimes. Although the success of UKIP is likely to exert a further centrifugal force on the Tory Party – sending its conservative wing off in the direction of Farage, and its social-democratic wing off towards what is left of the Liberals and towards Labour – the main result will be a further coming together of the interests of big capital, under the aegis of social democracy.

Whether that social democracy has the party label Labour or Tory, SDP or CDU etc. does not matter.

The other reason that May will mark the high water mark for the Far Right is the economic conjuncture. The long wave cycle turned from its Spring phase to its Summer phase around 2012/13. That means that strong global growth continues until around 2025-30, just as it did between 1999-2008, and indeed as it has done, in most of the world, outside Europe and North America, since 2009. But, the conditions under which that growth occurs have changed, and will continue to change. Firstly, the high prices of raw materials that characterised the earlier period, stop rising and begin to fall as large, new sources of supply come on stream. Secondly, the large gains in productivity that reduced the values of commodities and pushed up profits, slow down. Thirdly, the large increases in the supply of labour-power (both new workers and relative surplus population due to productivity growth) slows significantly.

China is already experiencing that and seeking sources of cheap labour in Vietnam, Indonesia, Africa etc. Even Britain is experiencing shortages for some skilled workers, exacerbated by the immigration cap. In the US, it was revealed that the top technology companies have formed a secret cartel so that none of them poach highly paid workers from the others, which would push up wages even further.

The consequence is that countries producing manufactured goods and services find it harder to sell to primary producing economies as the latter see their income fall, as raw material prices fall. Secondly, the latter see their currencies fall as their income falls. This pushes up domestic inflation. Workers seek higher wages, so profits fall. The rash of strikes across South Africa's mining sector is an indication of this process. But, this comes at a time when other emerging markets are seeing their currencies fall and inflation rates climb, in the backwash of the tapering of QE in the US. The result is sharply higher interest rates in these economies to defend the currency and curtail inflation. But, this process plays into and is part of a general rise in interest rates across the global economy.

Thirdly, the slow down in productivity growth means that the fall in commodity values slows down or stops. That is exacerbated by the fact that the world's main manufacturing power – China – has faced rising costs and a rising currency value, which makes the commodities it supplies to the world's consumers increasingly expensive.

In the last thirty years, a massive expansion in the quantity of money tokens and credit-money, pumped into circulation, did not cause consumer price inflation only because the value of those consumer goods was itself being massively reduced. In a world of slowing productivity growth, and rising commodity values, the massive amount of liquidity already in circulation, will inevitably result in sharply rising inflation.

The latest US data already suggest inflation is rising, and the only reason inflation in the UK and EU has fallen (besides the fact the figures are bogus because they do not include rising housing and pension costs) is because the value of the pound and euro have risen against the dollar, reducing import costs.

As interest rates rise across the globe, the money that flowed into Europe and the US, will flow out again, causing their exchange rates to fall, inflation rates to rise, and prompting another rise in interest rates, as bond investors seek to defend their assets against depreciation.

The consequence of this is a weakening of the economic conditions which have strengthened the positions of those sections of capital on which conservative and nationalist parties rely. Low interest rates are the condition for the growth of the “plethora of small capital”, as Marx describes it. It is seen in the 150,000 businesses in Britain described as “zombie firms”, who just about survive being able to repay this low rate of interest, but unable even to produce enough profit to repay the capital sum they have borrowed.

These zombie firms cling to existence on the back of these low interest rates, and on the back of the extraction of absolute surplus value from their low paid workers, who make up many of those on zero hours contracts. Many survive only because the low wages they pay are subsidised, by the state, by a transfer of tax, taken from the wages of other workers, and from the fact that their workers, even then, have to resort to Pay Day lenders, to make ends meet.

These small capitalists are the bedrock of the Tory Party, and what they represent makes up the bulk of votes for the Tories. UKIP simply represents the more extreme, more consistent exposition of those ideas. But, the Tories also draw support from other traditional sources, from the financial and landed oligarchy, and commercial capital. As Marx points out, wherever these interests predominate, the political regime is more reactionary than where industrial capital predominates. The centre for these interests in Britain, is London and its environs, and its there that the Tories have most of their support.

But, the consequence of the change in the conjuncture is that as well as interest rates rising for the reasons outlined, the rate of profit begins to fall, as all those causes of it previously rising go into reverse. A fall in the rate of profit first hits all of that plethora of small capital. The initial effect is likely to be a sharp rise in unemployment, as the zombie firms go bust. The large scale disguised unemployment of millions employed part-time, on temporary contracts, under employed, and on zero hours contracts will then be exposed, along with all of those who are supposedly self-employed, but who are simply scraping a living from underemployment on their own account.

But, ironically, big capital may benefit from this process. Part of the drag on its costs, represented by the taxes on its workers, to subsidise low paying small capitalists, will be lifted. To the extent it picks up capital on the cheap, its rate of profit will rise. More workers will be picked up by this big capital, paid higher wages, and may for the first time become organised in unions. But, in any case, the fall in the rate of profit, at a time when more productive capital will need to be employed as productivity growth falls, and in order to retain markets, means that interest rates will rise, as the supply of money-capital falls relative to its demand. The likely consequence will be in the short term a more serious financial collapse even than that of 2008/9.

It will fatally weaken the power of the financial and landed oligarchy and the merchant capitalists, as workers end their obsession with debt fuelled consumption and property speculation. It will by contrast strengthen big industrial capital and encourage its logical drive to establish a European state. To the extent it does that by mobilising social-democratic forces to achieve it, the power of conservative and nationalistic ideas will be further weakened.

In the second half of 2014, a new 3 year cycle will lead to a slow down in growth that will last until around mid 2015. Survey data is already indicating the onset of that cycle.  In countries like the UK, where austerity has been inflicted, it will give the lie to the idea that those policies have been beneficial. In Britain, where much of the recovery has been built on an encouragement of further debt, and the same kind of state intervention in the property market that led to the US sub-prime crisis, that is likely to be even more acute, particularly considering the huge number of people who now rely on Pay Day lenders, and food banks.

Despite the government throwing everything it could at it, outside London and a few other cities, the property market barely flickered. How could it do any more when in most of Britain around half the working age population now use Pay Day loans, and about a quarter of the population have used food banks.  The Liberal-Tory claims that we are all in this together, suggested again recently by Employment Minister Esther McVey, who said,

"It’s been a tough time for you, for me and everybody in the UK but we’ve now turned that round.” (Paul Mason's Blog)

shows just how remote they are from the real world.

A slow down in the economy, rising unemployment, rising interest rates, and increasing debt defaults will kill the property market. All suggestions that “this time its different” will be shown to be as false as when the same statements preceded the 75% drop in the NASDAQ in 2000!

The denouement in all this financial froth will be the death knell for those conservative and nationalist political forces that rose on the back of it. We should say good riddance to both.

Northern Soul Classics - The Fife Piper - The Dynatones

Classic Wheel Instrumental.

Friday, 18 April 2014

Marx and Engels' Theories of Crisis - Part 86

Crises Analysis– 1847, 1857, 2008, 20?? (6)

b) 1857 - continued


Marx explains the evolution of the crisis of 1857, and its relation to the cycle of stagnation, prosperity, boom, and crisis, and how this impacts the rate of profit and of interest, in similar terms to those I have set out elsewhere in relation to the Long Wave. Marx writes,

“After the reproduction process has again reached that state of prosperity which precedes that of over-exertion, commercial credit becomes very much extended; this forms, indeed, the "sound" basis again for a ready flow of returns and extended production. In this state the rate of interest is still low, although it rises above its minimum. This is, in fact, the only time that it can be said a low rate of interest, and consequently a relative abundance of loanable capital, coincides with a real expansion of industrial capital. The ready flow and regularity of the returns, linked with extensive commercial credit, ensures the supply of loan capital in spite of the increased demand for it, and prevents the level of the rate of interest from rising. On the other hand, those cavaliers who work without any reserve capital or without any capital at all and who thus operate completely on a money credit basis begin to appear for the first time in considerable numbers. To this is now added the great expansion of fixed capital in all forms, and the opening of new enterprises on a vast and far-reaching scale. The interest now rises to its average level. It reaches its maximum again as soon as the new crisis sets in. Credit suddenly stops then, payments are suspended, the reproduction process is paralysed, and with the previously mentioned exceptions, a superabundance of idle industrial capital appears side by side with an almost absolute absence of loan capital.”


In fact, at the moment before such crises erupt everything appears to be going well, because during such periods, asset and commodity prices are at their height, having been raised in the preceding period.

“Thus business always appears almost excessively sound right on the eve of a crash. The best proof of this is furnished, for instance, by the Reports on Bank Acts of 1857 and 1858, in which all bank directors, merchants, in short all the invited experts with Lord Overstone at their head, congratulated one another on the prosperity and soundness of business — just one month before the outbreak of the crisis in August 1857. And, strangely enough, Tooke in his History of Prices succumbs to this illusion once again as historian for each crisis. Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place.”

(ibid)

At this point, the demand for money as means of circulation and means of payment rises sharply. That very shortage causes the holders of money to hang on to it, increasing the shortage further, whilst sellers who have previously been happy to accept payment on credit, now demand hard cash, increasing the shortage further. Short run interest rates are driven sharply higher. There is a credit crunch. In 1847, and 1857, it was the limitations of the 1844 Bank Act, which exacerbated this shortage. Engels writes,

“By such artificial intensification of demand for money accommodation, that is, for means of payment at the decisive moment, and the simultaneous restriction of the supply the Bank Act drives the rate of interest to a hitherto unknown height during a crisis. Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis. In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time.”