Capital III, Chapter 26 - Part 2

By 1816, with the end of the Napoleonic Wars, the need of the state to fund its activities by borrowing declined, as its revenues increased with a rapidly expanding economy, relative to its expenditure. The debt/GDP ratio began to decline, but this meant that the opportunity to use money-capital, to obtain a steady income from lending to the state, declined. The amount of money-capital to issued government paper rose, thereby pushing up its price, and reducing its yield. In order to obtain yield, money-capital , therefore, went in search of increasingly risky , and speculative ventures. It is a process that has been seen again over the last 25 years.

“Of 1845 the same work says:

"Within a very recent period prices have sprung upwards from the lowest point of depression.... Consols touch par.... The bullion in the vaults of the Bank of England has ... exceeded in amount the treasure held by that establishment since its institution. Shares of every description range at prices on the average wholly unprecedented, and interest has declined to rates which are all but nominal. If these be not evidences that another heavy accumulation of unemployed wealth exists at this hour in England, that another period of speculative excitement is at hand." (Ibid., p. 36.)” (p 414)

Marx then quotes from J. G. Hubbard, “The Currency and the Country”, London 1843, and from the Parliamentary Report on Commercial Distress, 1847-8, to show how the crop failure and subsequent export of gold would result in a reduction of bank deposits, and the supply of potential money-capital, thereby raising interest rates. But, this natural rise in interest rates, arising from a reduction in supply of money-capital, was turned into a panic and financial crisis, as a result of the 1844 Bank Act. The first effect resulted from the Act, and the reduction in the bills of exchange it would discount. That meant that the interest on these bills of exchange rose more sharply.

““They began to scrutinise the bills ... The facilities of houses then began to be very seriously curtailed, and the weak houses began to fail. Those houses which ... relied upon their credit... went down. This increased the alarm that had been previously felt; and the bankers and others finding that they would not rely with the same degree of confidence that they had previously done upon turning their bills and other money securities into bank-notes, for the purpose of meeting their engagements, still further curtailed their facilities, and in many cases refused them altogether; they locked up their bank-notes, in many instances to meet their own engagements; they were afraid of parting with them.... The alarm and confusion were increased daily; and unless Lord John Russell .... had issued the letter to the Bank ... universal bankruptcy would have been the issue"” (Report on Commercial Distress p 74-5) (p 415-6)

This is also pretty much what happened to cause the financial crisis of 2008.

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