Engels sets out the reserves of fifteen of the largest London banks in 1892, which amounted to almost £28 million. He writes,
“Of this total reserve of almost 28 million, at least 25 million are deposited in the Bank of England, and at most 3 million are in cash in the safes of the 15 banks themselves. But the cash reserve of the banking department of the Bank of England amounted to less than 16 million during that same month of November 1892!” (Note 4, p 474)
The reserves of the banks, therefore, became merged with the reserves of the Bank of England. This is significant when, as happened in 1847 and 1857, there is a gold drain, which sparks a financial panic and credit crunch, because it then not only drains the reserves of the Bank of England, but also the commercial banks, whose reserves have become merged with it.
“However, this reserve fund also has a double existence. The reserve fund of the banking department is equal to the surplus of notes which the Bank is authorised to issue over and above the notes in circulation. The legal maximum of the note issue is £14 million (for which no bullion reserve is required; it is the approximate amount owed by the state to the Bank) plus the amount of the Bank's supply of precious metal. If the supply of precious metal in the Bank amounts to £14 million, the Bank can thus issue £28 million in notes, and if £20 million of these are in circulation, the reserve fund of the banking department is £8 million. These £8 million's worth of notes are then legally the banker's capital at the disposal of the Bank, and at the same time the reserve fund for its deposits. Now, if a drain of gold takes place, whereby the supply of precious metal in the Bank is reduced by £6 million — requiring the destruction of an equivalent number of notes — the reserve of the banking department would fall from £8 million to £2 million. On the one hand, the Bank would raise its rate of interest considerably; on the other hand, the banks having deposits with it, and the other depositors, would observe a large decrease in the reserve fund covering their own credits in the Bank. In 1857, the four largest stock banks of London threatened to call in their deposits, and thereby bankrupt the banking department, unless the Bank of England would secure a "government letter" suspending the Bank Act of 1844. In this way the banking department could fail, as in 1847, while any number of millions (e.g., 8 million in 1847) are held in its issue department to guarantee the convertibility of the circulating notes.” (p 473-4)
As in 1847, the Bank Act was suspended, and this enabled the bank to issue as many bank notes as was required to end the panic, without them being backed by gold. Engels describes it as,
“... thus, to create an arbitrary quantity of fictitious paper money-capital, and to use it for the purpose of making loans to banks, exchange brokers, and through them to commerce.” (Note 5, p 474)
In other words, this was the same process as was required to resolve the financial crisis of 2008. Engels' description here of this money-printing as the creation of “fictitious money-capital” is significant because it distinguishes it from actual money-capital. As described previously, contrary to the belief of the proponents of QE, money printing cannot create money-capital, but only money tokens. Because it cannot produce money-capital, it cannot thereby reduce interest rates. It may act to reduce specific interest rates as a result of the funds being used to buy specific securities, but only at the cost of causing other interest rates to rise, and, in the longer term, inflation.
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