Marx also quotes from the Reports of Committees Volume VIII, Commercial Distress, Volume III, Part 1, 1847-8. As a result of the 1844 Bank Act, when gold went out of the country, to cover the payment of Britain's food imports, following the crop failures, the Bank of England was required to reduce the money supply. Its interesting to compare this with the current experience of Q.E.
As Marx has described, the average rate of interest is determined by the demand and supply of money capital, not money, or money tokens. Both the demand for and supply of money-capital is ultimately determined by the rate of profit. If the rate of profit is high, there will be a higher demand for money-capital, because its use will bring a higher return. For the same reason, the owners of money-capital will require a higher rate of interest on it, for having given up this use value, of its potential to create profit. On the other hand, the higher rate of profit means that an increased mass of profit is produced, which takes the form of potential money-capital, when those profits are realised. So, the supply of money-capital is increased at the same time. It is the balance of these two effects that determines the rate of interest.
On this basis, its clear that printing money tokens (QE) cannot reduce the rate of interest, because all it does is to devalue the money token, and thereby affects both sides of this demand-supply equation equally, multiplying both sides by X. In fact, because it leads to inflation, the holders, particularly of longer dated securities, will, at some point, demand higher rates of interest, i.e. will sell their bonds, in order to recuperate the real terms reduction in their value.
A central bank can use QE to reduce some interest rates, but only at the cost of increasing others. If the bank buys 10 year gilts, for example, it will raise their price above where it would otherwise have been, and thereby reduce the yield on those bonds. The market, knowing the bank is acting to buy these bonds, will also buy them, knowing that their price is being manipulated higher. But, the money that thereby goes into those bonds has been diverted from elsewhere, so the prices of other securities are lower than they would have been, and interest rates higher. Moreover, in a global market, the effect of money printing cannot be confined to one country, and so money printing in once country may result in higher inflation in some other, and higher interest rates along with it.
The effect of money printing, and of money constriction are not equal and opposite. If money is printed, and put into circulation, first of all it may result in the velocity of circulation slowing down. It only causes inflation if it is actually borrowed and circulates, thereby pushing up prices. If it simply sits in bank accounts, it does not have this effect. Its only if bond holders begin to see inflation that they sell their bonds, and demand higher interest.
But, even if it does circulate, there is an approximately two years lag before it causes inflation to rise, so again the immediate fall in some interest rates may not be followed by a compensating rise, until two years later. However, by its nature, money-capital has the form of money, and can only act as capital if its money form is available in sufficient quantity. A lack of money, by definition, means a lack of money-capital, and the effect unlike too much money, is pretty immediate. As soon as it becomes difficult to get your hands on actual money, the more you will try to hold on to whatever actual money you have. Moreover, you will try to obtain payment in money, rather than credit, for the same reason.
But, for the same reason that capitalist development required the increasing use of credit, of money as means of payment rather than circulation, any return to those conditions, i.e. a requirement to pay for commodities immediately, brings with it an immediate slow down in transactions, in economic activity.
By the same token, those who have money-capital seek to hold on to it, and will only loan it out at high rates of interest. In other words, what develops, despite an ample supply of potential money-capital, is a credit crunch, because the money itself, which is required for that capital to assume the money form, has been constricted.
This is what happened in 1847, as a result of the Bank Act, at a time when the demand for money-capital was itself raised because of other factors to be discussed later. In 1847, faced with a constriction of actual money, the banks attempted to compensate by using bills of exchange, rather than their own bank notes.
“According to the same report, bankers were in the habit of giving such bills of exchange regularly in payment to their customers whenever money was tight. If the receiver wanted bank-notes, he had to rediscount this bill. For the banks this amounted to a privilege of coining money. Messrs. Jones, Lloyd and Co. made payments in this way "from time immemorial," as soon as money was scarce and the rate of interest rose above 5%. The customer was glad to get such banker's bills because bills from Jones, Loyd and Co. were easier discounted than his own;” (p 404)
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