Sunday, 3 April 2016

Capital III, Chapter 30 - Part 9

But, the existence of all of this commercial credit, plus the ability of firms to obtain cash from the discounting of bills of exchange, so clouds the underlying economic realities that money and credit can continue to flow smoothly long after economic conditions have changed.

“Thus business always appears almost excessively sound right on the eve of a crash. The best proof of this is furnished, for instance, by the Reports on Bank Acts of 1857 and 1858, in which all bank directors, merchants, in short all the invited experts with Lord Overstone at their head, congratulated one another on the prosperity and soundness of business — just one month before the outbreak of the crisis in August 1857. And, strangely enough, Tooke in his History of Prices succumbs to this illusion once again as historian for each crisis. Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place.” (p 484-5)

The increase in economic activity, and rate and mass of profit associated with prosperity, bring with it an increase in the quantity of loanable money-capital, which acts to keep interest rates low, even as the high rate of profit causes the demand for money-capital also to be high. But, there can be a surfeit of money-capital also in quite different conditions.

“This becomes most evident in the phase of the industrial cycle immediately following a crisis, when loan capital lies around idle in great quantities. At such times, when the production process is curtailed (production in the English industrial districts was reduced by one-third after the crisis of 1847), when the prices of commodities are at their lowest level, when the spirit of enterprise is paralysed, the rate of interest is low, which in this case indicates nothing more than an increase in loanable capital precisely as a result of contraction and paralysation of industrial capital...Hence the demand for loanable money-capital, either to act as a medium of circulation or as a means of payment (the investment of new capital is still out of the question), decreases and this capital, therefore, becomes relatively abundant. Under such circumstances, however, the supply of loanable money-capital also increases, as we shall later see.” (p 485)

Marx then discusses the arguments put forward to explain this situation, by the bankers. He quotes the testimony of Hodgson, a director of the Royal Bank of Liverpool.

“'The pressure' (1847) "arose from the real diminution of the moneyed capital of the country, caused partly by the necessity of paying in gold for imports from all parts of the world, and partly by the absorption of floating into fixed capital.” (p 486)

But, of course, as can be seen, rather than a shortage there is a surfeit of money-capital. The gold drain was not a drain of capital – it was a transfer of capital. The pressure did not arise from the gold drain, but from the limitations imposed by the Bank Act, which caused a credit crunch, because it limited the amount of currency in circulation as a response to the gold drain. Moreover,

“How the conversion of floating capital into fixed capital reduces the money-capital of a country is unintelligible.” (p 486)

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