“Mr. A in London instructs a Mr. B to buy from the manufacturer C in Manchester commodities for shipment to a Mr. D in East India. B pays C in six months' drafts to be made out by C on B. B secures himself by six months' drafts on A. As soon as the goods are shipped A makes out six months' drafts on D against the mailed bill of lading.
"The shipper and the co-signee were thus both put in possession of funds — months before they actually paid for the goods; and, very commonly, these bills were renewed at maturity, on pretence of affording time for the returns in a 'long trade'.”” (p 409)
Moreover, the more this increased the debt of the manufacturers that needed to be repaid, the more this led them to send out further, essentially bogus, consignments solely to obtain money loaned against them, in order to cover their latest debt to fall due.
And, it was not just in Britain that these swindles were conducted. Likewise, in India and China, goods were purchased to be sent to England, and on the basis of these shipments loans were raised.
““Houses in India, who had credit to pass their bills, were purchasers of sugar, indigo, silk, or cotton — not because the prices advised from London by the last overland mail promised a profit on the prices current in India, but because former drafts upon the London house would soon fall due, and must be provided for. What was so simple as to purchase a cargo of sugar, pay for it in bills upon the London house at ten months' date, transmit the shipping documents by the overland mail; and, in less than two months, the goods on the high seas, or perhaps not yet passed the mouth of the Hoogly, were pawned in Lombard Street — putting the London house in funds eight months before the drafts against those goods fell due. And all this went on without interruption or difficulty, as long as bill-brokers had abundance of money 'at call,'; to advance on bills of lading and dock warrants, and to discount, without limit, the bills of India houses drawn upon the eminent firms in Mincing Lane."” (p 409) Engels points out that the basis of this fraud was essentially ended when the goods began to be shipped by steam boat via the Suez Canal, thereby slashing the circulation time of the capital.
The extent of the contraction in the money supply was illustrated in the Report on Commercial Distress, 1847-8, quoted by Marx. In April 1847, the Bank of England announced that it would reduce its discount business with the Royal Bank of Liverpool by half. As one of the main trading centres of the time, banks in Liverpool continually received large inflows and outflows. The various merchants and export houses usually paid cash into the bank, but as the quantity of money in the economy began to contract, a larger proportion of their payments took the form of bills of exchange. The bank, in turn, would have to pay the bills accrued by the merchants for their purchases, often from abroad. In order to make these payments, the banks in Liverpool needed to obtain cash or Bank of England notes, by discounting their own bills with it. The announcement of the Bank of England's reduction in its discounting activity meant that these banks would have less money to be able to make such payments.
““The announcement operated with peculiar hardship on this account, that the payments into Liverpool had latterly been much more in bills than in cash; and the merchants who generally brought to the Bank a large proportion of cash with which to pay their acceptances, had latterly been able to bring only bills which they had received for their cotton and other produce, and that Increased very rapidly as the difficulties increased.... The acceptances ... which the Bank had to pay for the merchants, were acceptances drawn chiefly upon them from abroad, and they have been accustomed to meet those acceptances by whatever payment they received for their produce.... The bills that the merchants brought... in lieu of cash, which they usually brought ... were of various dates, and of various descriptions; a considerable number of them were bankers' bills, of three months' date, the large bulk being cotton bills. These bills of exchange, when bankers' bills, were accepted by London bankers, and by merchants in every trade that we could mention — the Brazilian, the American, the Canadian, the West Indian.... The merchants did not draw upon each other; but the parties in the interior, who had purchased produce from the merchants, remitted to the merchants bills on London bankers, or bills on various parties in London, or bills upon anybody. The announcement of the Bank of England caused a reduction of the maturity terms of bills drawn against sales of foreign products, frequently extending to over three months".” (p 410)
But, this contraction in money supply also occurred at a time when the demand for money was high. The prosperity from 1844-47, coincided with the Railway Mania. Although the large surplus profits meant that the initial payments for stock could be made in cash, as was seen earlier, many businesses were also starved of cash to provide funds for the speculation. Firms then had to borrow to cover their need for working capital. But the swindles also led to further large scale borrowing to cover the further calls for railway shares, as they fell due.
“In April 1847 "almost all mercantile houses had begun to starve their business more or less ... by taking part of their commercial capital for railways" (p.42). "Loans were made on railway shares at a high rate of interest, say, 8%, by private individuals, by bankers and by fire-offices" (p. 66). "Loans to so great an extent by commercial houses to railways induced them to lean too much upon banks by the discount of paper, whereby to carry on their commercial operations"” (p 410)
In April, money to cover these calls had flowed into the banks coffers, which increased their available funds. But, by October, that had changed.
“"In the summer that melted gradually away, and on the 31st of December it was materially less. One cause ... of the pressure in October was the gradual diminution of the railway money in the bankers' hands; between the 22nd of April and the 31st of December the railway balances in our hands were reduced one- third; and the railway calls have also had this effect throughout the Kingdom; they have been gradually draining the deposits of bankers"” (p 410)
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