Capital III, Chapter 26 - Part 8

The argument comes down to this. Proponents of the Currency School, like Overstone, failed to grasp the difference between money and capital. Indeed, as will be seen by later testimony, they did not even believe that industrialists and merchants were capitalists. For them, capitalists were only those people who had loanable money-capital. Consequently, they shared the same delusion as the current proponents of QE that an increase in money supply was the same thing as an increase of money-capital, thereby causing interest rates to fall, because the value of capital thereby falls, and a contraction of the money supply causes the value of capital to rise, thereby leading to a rise in interest rates. As Marx goes on to demonstrate, this is, of course, nonsense. It is equally nonsense today in the guise of QE.

In 1847, the demand for money-capital increased for a variety of reasons. The crop failures meant that the price of various agricultural products rose. Some of these constituted raw material for a number of industries, thereby increasing the value of the elements of constant capital, and creating a corresponding increased demand for money-capital, for its purchase. They also constituted a significant portion of workers consumption, thereby putting upward pressure on wages, and a further demand for money-capital.

But, as seen previously, the prior high level of profits had caused low interest rates and speculation, as well as outright fraud and swindling. As well as shipments of commodities from Britain to the Far East, simply to obtain money on account from the discounting of bills, the same thing happened in the other direction, with the shipment of sugar to Britain etc. On top of that had been the speculation in railway shares.

“All these things, over-production in industry and underproduction in agriculture — in other words, greatly differing causes — gave rise to an increased demand for money-capital, i.e., for credit and money. The increased demand for money-capital had its origin in the course of the productive process itself. But whatever may have been the cause, it was the demand for money-capital which made the interest rate, the value of money-capital, climb. If Overstone means to say that the value of money-capital rose because it rose, then it is tautology. But if, by "value of capital," he means a rise in the rate of profit as the cause of the rise in the rate of interest, we shall immediately see that this is wrong. The demand for money-capital, and consequently the "value of capital," may rise even though the profit may decrease; as soon as the relative supply of money-capital shrinks, its "value" increases. What Overstone wished to prove is that the crisis of 1847, and the attendant high interest rate, had nothing to do with the "quantity of money," i.e., with the regulations of the Bank Act of 1844 which he had inspired; although it was, indeed, connected with them, inasmuch as the fear of exhausting the bank reserve — a creation of Overstone — contributed a money panic to the crisis of 1847-48.” (p 420-21)

The consequence was that all this speculation and fraud that led to overproduction of commodities, sent to the Far East, and over-trading in commodities like sugar, sent to Britain, was bound to result, at some point, in the capital tied up in these commodities being massively depreciated, as they failed to find buyers, at prices that reproduced that capital. The same thing happened in 2008 with all of the fictitious capital on the books of the financial institutions, and in respect of the grossly inflated prices of physical assets such as houses, that underlay it.

“What the people, who had bought corn at 120 shillings per quarter, lacked when it fell to 60 shillings, were the 60 shillings which they had overpaid and the corresponding credit for that amount in Lombard Street advances on the corn. It was by no means a lack of bank-notes that prevented them from converting their corn into money at its old price of 120 shillings. The same applied to those who had imported an excess of sugar, which became almost unsaleable. It applied likewise to the gentlemen who had tied up their floating capital in railways and relied on credit to replace it in their "legitimate" business. To Overstone all this signifies a "moral sense of the enhanced value of his money." But this enhanced value of money-capital corresponded directly on the other hand to the depreciated money-value of real capital (commodity-capital and productive capital). The value of capital in the one form rose because the value of capital in the other fell. Overstone, however, seeks to identify these two values of different sorts of capital in a single value of capital in general, and he tries to do so by opposing both of them to a scarcity of the medium of circulation, of available money. But the same amount of money-capital may be loaned with very different quantities of the circulation medium.” (p 421)

The same was true in 2008. What the people lacked, who had paid $200,000 for a house that fell to $50,000, was the $150,000 they had overpaid for the house. That same fact, applied in Ireland and Spain, and everywhere else where house prices had been grossly inflated. But, it also applied to the various financial assets that had been created upon them, from straightforward mortgages to mortgage backed securities, credit default swaps, and so on, which also signifies the underlying insolvency of the banks themselves.

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