Capital III, Chapter 28 - Part 6

“What strikes Fullarton and others as decisively important is the phenomenon that in such periods when securities in possession of the Bank of England are on the increase, its circulation of notes decreases, and vice versa. The level of the securities, however, expresses the volume of the pecuniary accommodation, the volume of discounted bills of exchange and of advances made against marketable collateral.” (p 450)

This is what is called open market operations, or now quantitative easing. In other words, if the central bank wishes to put more money into circulation, it can do so by buying securities from the commercial banks. These securities are generally government bills, such as gilts, or US Treasuries, but they can be any kind of bill, such as a bill of exchange. The central bank buys the bill, and thereby provides the commercial bank with money, which it can lend out.

“What the bank advances, therefore, is under all circumstances money. This money, however, now constitutes a part of its capital. If it advances gold, this is understandable. If it advances notes, then these notes represent capital, because it has given up some actual value for them, such as interest-bearing paper.” (p 451)

What is the process by which this money returns to the bank? If there is an adverse balance of trade, which necessitates an export of gold, then the bank discounts bills of exchange, representing the payments to be made. Bank notes are then issued in exchange for these bills. The bank note itself represents gold. It is a “promise to pay” a certain value in gold. 

“The bank-notes are exchanged for gold by the Bank itself, in its issue department, and this gold is exported. It is as though the Bank paid out gold directly, without the mediation of notes, on discounting bills.” (p 451)

This does not add any money to the circulation of money in Britain. The bank notes are returned to the bank, and the gold is transferred to the receiving country, whereby it acts as the basis for the issue of bank notes into circulation there.

“If it is now said that the Bank advances capital, and not currency, this means two things. First, that it does not advance credit, but actual values, a part of its own capital or of capital deposited with it. Secondly, that it does not advance money for inland, but for international circulation, that it advances world-money; and for this purpose money must always exist in its form of a hoard, in its metallic state; in the form in which it is not merely a form of value, but value itself, whose money-form it is. Although this gold now represents capital, both for the Bank and the exporting gold-dealer, i.e., banking or commercial capital, the demand for it is not for capital, but for the absolute form of money-capital. This demand arises precisely at the moment when foreign markets are overcrowded with unsaleable English commodity-capital. What is wanted, therefore, is capital, not as capital, but capital as money, in the form in which money serves as a universal world-market commodity; and this is its original form of precious metal.” (p 451-2)

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