Capital III, Chapter 25 - Part 6

The cause of the financial crash that necessarily flowed from the speculative bubble, was the crop failure of 1846, whose most notable feature was the Irish famine. But, both Ireland, that acted as Britain's bread basket, and the rest of Britain, had to import large amounts of food from the continent, to make up the difference. Britain was already the workshop of the world, and supplying large quantities of manufactured goods to Europe. So, its capacity to pay for this imported food with additional exports, was limited. That should have posed no real problem. As seen earlier, Britain had a large trade surplus, its coffers were stuffed full of gold, earned in the previous years from its exports. And, indeed, it paid for this imported food by shipping some of this gold in payment. However, the 1844 Bank Act required that the country's money supply be determined not by the requirements of the commodities to be circulated, but by the quantity of gold in its reserves. The large outflow of gold, therefore, required that the money supply be contracted, just at the very time when more money was required in circulation.

“Gold worth at least nine million was sent abroad. Of this amount no less than seven and a half million came from the treasury of the Bank of England, whose freedom of action on the money-market was thereby considerably impaired. Other banks, whose reserves were deposited with the Bank of England and were practically identical with those of that Bank, were thus also compelled to curtail accommodation of money. The rapid and easy flow of payments was obstructed, first here and there, then generally. The banking discount rate, still 3 to 3½% in January 1847, rose to 7% in April, when the first panic broke out. The situation eased somewhat in the summer (6½%, 6%), but when the new crop failed as well panic broke out afresh and even more violently. The official minimum bank discount rose in October to 7 and in November to 10%; i.e., the overwhelming mass of bills of exchange was discountable only at outrageous rates of interest, or no longer discountable at all. The general cessation of payments caused the failure of several leading and very many medium-sized and small firms. The Bank itself was in danger due to the limitations imposed by the artful Bank Act of 1844. The government yielded to the general clamour and suspended the Bank Act on October 25, thereby eliminating the absurd legal fetters imposed on the Bank. Now it could throw its supply of bank-notes into circulation without hindrance. The credit of these bank-notes being in practice guaranteed by the credit of the nation, and thus unimpaired, the money stringency was thus instantly and decisively relieved. Naturally, quite a number of hopelessly enmeshed large and small firms failed nevertheless, but the peak of the crisis was overcome, the banking discount dropped to 5% in December, and in the course of 1848 a new wave of business activity began which took the edge off the revolutionary movements on the continent in 1849, and which inaugurated in the fifties an unprecedented industrial prosperity, but then ended again — in the crash of 1857.” (p 408)

This is remarkably similar to the financial crash of 2008, and its aftermath. In fact, the 1847 crash had a much larger impact on the real economy. According to Marx, that financial crisis caused economic activity to contract by 37%! It also had a dramatic impact on the fictitious capital that had been built up. He quotes a House of Lords document that shows the fall in the value of stocks and bonds.

“According to it the depreciation of October 23, 1847, compared with the level in February of the same year, amounted to:

On English government bonds	£93,824,217
On dock and canal stock	£1,358,288
On railway stock	£19,579,820
Total	£114,762,325

(Capital III, p 408-9)

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