The size of the bank's profits then depends upon the size of its own capital, against which it can make loans and issue notes, and in the size of its deposits, which it also lends out at interest. Marx also quotes Gilbart's comment,
"It is the object of banking to give facilities to trade, and whatever gives facilities to trade gives facilities to speculation. Trade and speculation are in some cases so nearly allied, that it is impossible to say at what precise point trade ends and speculation begins.... Wherever there are banks, capital is more readily obtained, and at a cheaper rate. The cheapness of capital gives facilities to speculation, just in the same way as the cheapness of beef and of beer gives facilities to gluttony and drunkenness" (p 405-6)
This leads on to Marx and Engels' analysis of the various frauds that arose on the back of trade and credit. Also central to this expansion of credit was fractional reserve banking. Because banks realised that, at any one time, customers would only on average require access to around 10% of the money they had deposited with the bank, this meant that the bank could lend out the other 90%. But, these loans take themselves the form of deposits, so that the total deposits of the banks are increased ten fold. This is the effect of the credit multiplier.
Engels comments.
“The easier it is to obtain advances on unsold commodities, the more such advances are taken, and the greater the temptation to manufacture commodities, or dump already manufactured commodities in distant markets, just to obtain advances of money on them. To what extent the entire business world of a country may be seized by such swindling, and what it finally comes to, is amply illustrated by the history of English business during 1845-47.” (p 406)
The period from around 1825, when the first crisis of overproduction occurred, until 1842, was a period of long wave downturn. From around 1837, there had been particular stagnation. But, from the end of 1842, until around 1865, it went through a new long wave boom. The demand for exports grew considerably, and Engels comments that 1845 and 1846 marked a period of greatest prosperity. Engels quotes the words of a fellow textile manufacturer, who said to him, with the end of the Opium War,
"How can we ever produce too much? We have to clothe 300 million people," (p 407)
This huge boom in trade was backed by a high and rising rate and mass of profit. As was described in Chapter 6, this led to the factories being expanded, closed factories being re-opened, new and additional machines installed, and many former managers and workers, often using borrowed capital, to set up in business themselves, to try to grab some of this rapidly expanding mass of profits.
It was similar to the high and rising rate and mass of profit from the late 1980's, that created the basis for the expansion of capital on a rapid scale after 1999, and which sent China from being a backward peasant economy to being the largest economy, on the basis of purchasing power parity by 2014.
Similar to the experience during the late 1980's, and through the 2000's, however, the mass of profit was so great that not all of it could be physically invested in productive-capital. It hung over the money market, as potential money capital, and thereby depressed interest rates, encouraging speculation and swindling.
“But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire. With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844, stock was fully underwritten, i.e., so far as there was money to cover the initial payments.” (p 407)
The drive for speculation, fuelled by the huge and rapid capital gains that could be made in the Railway Mania, was so great that, despite the high levels of profits, to be made from production, capitalists diverted funds from their businesses into buying railway shares. A similar thing has been seen with the repeated financial bubbles blown up since the late 1980's.
As a result, their businesses suffered shortages of working capital that had to be made good with borrowing, which was fine so long as interest rates remained low, and credit was available. And, because of the boom, and the mass of profit, interest rates were low and credit was available.
“The bank discount rate stood low: 1¾ to 2¾% in 1844, less than 3% until October 1845, rising to 5% for a while (February 1846), then dropping again to 3¼% in December 1846. The Bank of England had an unheard-of supply of gold in its vaults. All inland quotations were higher than ever before.” (p 407)
Manufacturers took the opportunity not only to produce as much as they could, to send to the Far East, but also to engage in further speculation, buying up commodities in India to be shipped back to England on the return journey. The manufacturers, on the basis of these mass consignments, borrowed extensively from the banks, who lent against the consignment notes, and bills of exchange. It could take nine months for goods to reach India and China. All that time, the bank had advanced money-capital to the manufacturer who used it to buy productive-capital, in order to ship out even more commodities, without knowing whether the goods they had shipped months before had found a market or not.
But, illustrating Gilbart's point that its hard to know where trade ends and speculation begins, the more the manufacturers sought credit to cover their speculation in railway shares etc., the more these consignments took on the nature of being for no other reason than to obtain an advance of credit from the bank.
This leads on to Marx and Engels' analysis of the various frauds that arose on the back of trade and credit. Also central to this expansion of credit was fractional reserve banking. Because banks realised that, at any one time, customers would only on average require access to around 10% of the money they had deposited with the bank, this meant that the bank could lend out the other 90%. But, these loans take themselves the form of deposits, so that the total deposits of the banks are increased ten fold. This is the effect of the credit multiplier.
Engels comments.
“The easier it is to obtain advances on unsold commodities, the more such advances are taken, and the greater the temptation to manufacture commodities, or dump already manufactured commodities in distant markets, just to obtain advances of money on them. To what extent the entire business world of a country may be seized by such swindling, and what it finally comes to, is amply illustrated by the history of English business during 1845-47.” (p 406)
"How can we ever produce too much? We have to clothe 300 million people," (p 407)
This huge boom in trade was backed by a high and rising rate and mass of profit. As was described in Chapter 6, this led to the factories being expanded, closed factories being re-opened, new and additional machines installed, and many former managers and workers, often using borrowed capital, to set up in business themselves, to try to grab some of this rapidly expanding mass of profits.
It was similar to the high and rising rate and mass of profit from the late 1980's, that created the basis for the expansion of capital on a rapid scale after 1999, and which sent China from being a backward peasant economy to being the largest economy, on the basis of purchasing power parity by 2014.
Similar to the experience during the late 1980's, and through the 2000's, however, the mass of profit was so great that not all of it could be physically invested in productive-capital. It hung over the money market, as potential money capital, and thereby depressed interest rates, encouraging speculation and swindling.
“But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire. With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844, stock was fully underwritten, i.e., so far as there was money to cover the initial payments.” (p 407)
As a result, their businesses suffered shortages of working capital that had to be made good with borrowing, which was fine so long as interest rates remained low, and credit was available. And, because of the boom, and the mass of profit, interest rates were low and credit was available.
“The bank discount rate stood low: 1¾ to 2¾% in 1844, less than 3% until October 1845, rising to 5% for a while (February 1846), then dropping again to 3¼% in December 1846. The Bank of England had an unheard-of supply of gold in its vaults. All inland quotations were higher than ever before.” (p 407)
But, illustrating Gilbart's point that its hard to know where trade ends and speculation begins, the more the manufacturers sought credit to cover their speculation in railway shares etc., the more these consignments took on the nature of being for no other reason than to obtain an advance of credit from the bank.
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