Capital III, Chapter 35 - Part 13

Newmarch summarises the difference between whether the £12 million investment is made by a transfer of money-capital, or commodity-capital, and half of it flowing back to Britain by various means. If it was sent as money-capital, then this would immediately go into circulation in India, and £6 million may flow back immediately for the purchase of commodities. But, £12 million would already have been taken out of circulation, in Britain. If, however, it was sent in the form of rails etc., this would add nothing to circulation in India, and there would be nothing to flow back immediately. The only flow back would be over the longer term from the dividends on the Indian railways.

“What does he mean when he says six million would return immediately? In so far as the £6 million have been expended in England, they exist in rails, locomotives, etc., which are shipped to India, whence they do not return; their value returns very slowly through amortisation, whereas the six million in precious metal may perhaps return very quickly in kind. In so far as the six million have been expended in wages, they have been consumed; but the money used for payment circulates in the country the same as ever, or forms a reserve. The same holds true for the profits of rail producers and that portion of the six million which replaces their constant capital. Thus, this ambiguous statement about returns is used by Newmarch only to avoid saying directly: The money has remained in the country, and in so far as it serves as loanable money-capital the difference for the money-market (aside from the possibility that circulation could have absorbed more coin) is only that it is charged to the account of A instead of B. An investment of this kind, where capital is transferred to other countries in commodities, not in precious metal, can affect the rate of exchange (but not the rate of exchange with the country in which the exported capital is invested) only in so far as the production of these exported commodities requires an additional import of other foreign commodities. This production then cannot balance out the additional import. However, the same thing happens with every export on credit, no matter whether intended for capital investment or ordinary commercial purposes. Moreover, this additional import can also call forth by way of reaction an additional demand for English goods, for instance, on the part of the colonies or the United States.” (p 581-2)

Newmarch had previously testified that British exports to India exceeded the imports, but this was not exactly true. In 1855, Britain's imports from India, were £12,670,000, whereas the exports were £10,350,000, leaving a deficit of £2,320,000. However, India House, based in London, then announced that they would make drafts on the various presidencies in India, amounting to £3,250,000 to cover its expenses, and dividends to shareholders. In other words, this amounted to simply imposing a tribute, levied on India, to cover the expenses of the East India Company/government. Thereby, a deficit was turned into a £1 million trade surplus, in Britain's favour.

According to Newmarch, in response to Sir Charles Wood, what it was being paid for here was the introduction of “good government into India.”

Marx responds,

“Wood, as a former Minister for India, knows full well the kind of "good government" which the British import to India, and correctly replies with irony: 

"1926. Then the export, which, you state, is caused by the East India drafts, is an export of good government, and not of produce." 

Since England exports a good deal "in this way" for "good government" and as capital investment in foreign countries — thus obtaining imports which are completely independent of the ordinary run of business, tribute partly for exported "good government" and partly in the form of revenues from capital invested in the colonies or elsewhere, i.e., tribute for which it does not have to pay any equivalent — it is evident that the rates of exchange are not affected when England simply consumes this tribute without exporting anything in return. Hence, it is also evident that the rates of exchange are not affected when it reinvests this tribute, not in England, but productively or unproductively in foreign countries; for instance, when it sends munitions for it to the Crimea.” (p 583)

Back To Part 12

Forward To Part 14

Khan Falls At The First Fence

Its less than a month since Saddiq Khan was elected as London Mayor.  He has failed the first political test presented to him, and its not as though it was a difficult test to pass.  Has he learned nothing from the political extermination of the Liberals, as a result of their coalition with the most right-wing Tories for decades; has he learned nothing from the experience of the similar alliance of Labour politicians with those same Tories, during the Scottish referendum, that consigned Labour, in Scotland, to almost as worse a fate as the Liberals in the rest of Britain?  The answer is clearly, no. He has not learned anything from those clear lessons, and many more like them in history.  But, then for these career politicians, they are more concerned with keeping themselves in the limelight, and their own moth like attraction to governmental power than any longer term effect on the party that got them elected in the first place.

Khan excused his lash up with posh boy Cameron, by saying that the referendum was about the future of London and of Britain.  Quite true, but then if it is so important why would you suggest to voters that the most right-wing Tory government for years, led by Cameron, has the policies to ensure that future?!  The fact, is and Cameron restated it on the platform today, that there is little difference between the policies of the Tory Remainers, and the Tory/UKIP Leavers, when it comes to their attitude to the working-class and workers rights.  The only difference is that Cameron and Osbourne know that British capital would be isolated and diminished, outside the EU, and hope that they can negotiate the kinds of exclusions they require from EU social legislation, so as to be able to continue to attack workers, whilst the Brexiteers want to begin those attacks on British workers rights straight away.

In the London Mayoral election, those same Tories launched what was almost universally recognised to be one of the most vicious, racist and reactionary campaigns seen for a very long time.  The main target of that campaign was Khan himself.  Khan is a soft Blairite, and yet the Tories tried to make him out to be some kind of radical.  Their campaign, including the use of Prime Minister's Question Time, by Cameron, resorted to the level of the gutter.

If I were a Labour Party member in London, who had helped to get Khan elected, or a Labour voter in London, who had voted for him, in the face of that reactionary campaign, by Cameron and the Tories, I would feel thoroughly betrayed by Khan.  Why would I have got Khan elected as a Labour politician, only to see him stand shoulder to shoulder with that same Cameron, as though they are best buddies?  Its that kind of thing that convinces people that for career politicians like Khan, its all just a game, and that they believe absolutely nothing they say, because the following day they have completely forgotten it, as they try to advance their career.

Following, the reactionary, racist Tory campaign during the London elections, and having won such a clear mandate, Khan had the opportunity to use his platform as London Mayor, and that clear majority, to have set out a clear vision for London in Europe.  He could have set out an internationalist message of solidarity with all workers across Europe, against the nationalist and racist agenda being promoted by the Tories.  Instead of standing on a platform with Cameron, and providing a left cover for the Tories' reactionary agenda, Khan could have stood on a platform with socialist mayors, and politicians from Syriza, Podemos, the Left Bloc and so on, all of whom are fighting against austerity, and conservative policies across the EU.  He could then have been joined by Corbyn and McDonnell, and by people like Yanis Varoufakis who are arguing for a different type of Europe to the austerity ridden, backward looking politics of Cameron and his co-thinkers in other countries.

That Khan didn't do that, and instead jumped at the first opportunity to associate himself with Cameron tells us a lot.  It is a lesson that grass roots members of the Labour Party across the country should learn, and apply in coming months, as they come to select candidates to stand in council elections, and parliamentary elections.  Its time to get rid of the careerists, time servers and closet Tories.

Capital III, Chapter 35 - Part 12

Marx summarises the situation.

“What we are here concerned with is the value of money-capital, i.e., the interest rate. Wilson would like to identify money-capital with capital in general. The simple fact is essentially that 12 million were subscribed in England for Indian railways. This is a matter which has nothing directly to do with the rates of exchange, and the designation of the £12 million is also the same to the money-market. If the money-market is in good shape, it need not produce any effect at all on it, just as the English railway subscriptions in 1844 and 1845 left the money-market unaffected. If the money-market is already in somewhat difficult straits, the interest rate might indeed be affected by it, but certainly only in an upward direction, and this, according to Wilson's theory, would favourably affect the rates of exchange for England, that is, it would work against the tendency to export precious metal; if not to India, then to some other country.” (p 580-1)

In other words, what Marx is actually setting out, the more his analysis moves away from having established the underlying value relations, to actually analysing the phenomenal form of those relations, is closer to a marginal analysis. Previously, in his comments on demand, for example, he went from the simplifying assumptions, used in Capital I, that supply always finds adequate demand, to the reality that demand is a function of use value, and so supply faces the problem of elasticity of demand. He develops that even more in Theories of Surplus Value.

His explanation of the rate of interest, as wholly determined by supply and demand for money-capital, also notes the effect to which the degree and necessity of demand can have a greater effect on causing a rise in the rate. For example, in a crisis, the fact that firms must have money-capital (in the form of money, liquidity) to stay afloat, causes them to be prepared to pay much higher rates than during those times when high rates of profit cause them to demand more money-capital in order to expand.

Later, this approach finds its ultimate form in Marx’s theory of Differential Rent, which expresses this marginalism clearly. The thought expressed here that, if the money-market is in good shape, increased demand for money-capital may have no effect, is no different to his previous analysis of market prices for commodities, under conditions where either demand was in excess of supply, equal to it, or below it. It is the same as his analysis later, in relation to rent, as to whether demand for wheat is above, at or below, the level of supply.

In the same way,

“The interest rate may affect the rates of exchange, and the rates of exchange may affect the interest rate, but the latter can be stable while the rates of exchange fluctuate, and the rates of exchange can be stable while the interest rate fluctuates.” (p 581)

In other words, a rise in the interest rate will tend to cause the exchange rate to rise, and vice versa, because a higher rate of interest will draw in money-capital. Similarly, a fall in the exchange rate will tend to cause a rise in interest rates, because it will be associated with an outflow of money-capital. But, neither of these things necessarily occur, because they depend on general conditions. A rise in the rate of interest may be an indication of strong economic growth and high rates of profit, causing increased demand for money-capital. So, firms may actually be reducing costs, becoming more competitive and exporting more, thereby creating the conditions for the exchange rate to rise. On the other hand, high interest rates may be an indication that the exchange rate is falling, and that there is an increased demand for external funding. It could be an indication of a failing economy, in which there is falling levels of confidence.

Back To Part 11

Forward To Part 13

Reasons To Remain – Solidarity

The Punchline

Workers have a different reason for voting to remain in the EU than does Cameron and many Labour politicians. History has shown that we are weak when divided, and strong when united. Our interest lies in unity with other workers across the EU, on the basis of a common fight for decent conditions, against austerity, and to build a different kind of future. We need to remain to build greater unity and solidarity with other EU workers, on the basis of a fight for that better future for all of us, not to be diverted into the false idea of “I'm alright, Jack.”

In this series of posts on the EU, I'm providing a new format. First, the punchline, so that you can decide whether to read on, then a short version that summarises the main points, and a longer explanation of the arguments, for those who have the time to read in more detail.

If You Are In A Rush

• United we stand divided we fall
  
• Workers created trades unions, because they quickly realised that they needed to combine so that instead of competing against each other, for jobs, they were stronger when they co-operated with each other.
  
• The more people joining together in an organisation, be it a trades union, a sports club or anything else, the stronger the organisation and its members are.
  
• Workers created trades unions that were based not just in one workplace, but in entire industries, because they realised that they didn't just need to avoid competition, with each other, in the workplace, but to stop one workplace being set against another, one firm being set against another. Only then could they defend wages and conditions across the entire industry.
  
• When firms became transnational and multinational, that understanding and principle was extended. Workers created Combine Committees, so that they could co-operate with workers in the same firm in different countries, and in the same industry in different countries.
  
• Workers found that there were some things that they all had in common, whatever firm or industry they worked in, and which it was logical to negotiate as a whole, with the state, rather than individually with employers. For example, it is rational to have a common set of minimum holiday entitlements, maximum working hours, health and safety regulations, working ages and so on. Workers are in a stronger position when they negotiate these things collectively, and also its easier for employers to agree to them, when they all have to abide by some legal set of minimum, civilised rules of behaviour, many of which are in their own longer term interests.
  
• Its not that the EU Commission are friends of workers that leads them to introduce the measures on Working-Time, Maternity and Paternity Entitlement and so on – though, as happened in the past, with the Factory Inspectors, in England, in the 19^th century, for example, these state functionaries can often see what is in the overall, longer-term interests of firms than the individual firms can themselves – it is rather that workers across the EU, are stronger together to be able to press for such minimum standards, and firms operating within the EU are more likely to agree to them, if they all have to abide by the same requirements, than if one country can try to undercut others, to gain advantage for its businesses, at the expense of its workers.
  
• The problems facing workers in Greece and other countries are not problems created by the EU, or by the Euro, but by the conservative policies that have been implemented. The source of those conservative policies of austerity is not the EU, but conservative forces in each nation. The EU did not force austerity on the Liberal-Tory government in the UK, after 2010, for example, which sent a growing economy into a recession, which lasted for four years, until Osbourne was forced to change course, and start spending money on capital investment.
  
• Workers across the EU need greater unity, greater solidarity so as to oppose those conservative policies, and to demand higher minimum standards. Separating ourselves off into smaller individual national units is the opposite of the direction we need to travel, and goes against every lesson of solidarity we have learned over the last 200 hundred years.
  
• The election of Syriza in Greece, of the Left Bloc in Portugal, the success of Podemos in Spain, and of Jeremy Corbyn in Britain, shows that many workers are fed up of austerity and conservative policies that have caused stagnation across Europe for the last six years. But, those conservative policies can only be defeated, and governments like Syriza not be isolated, if workers come together across Europe to fight for their common interests.

≈

If You Have Time

As I wrote a while ago, workers have completely different reasons for voting to remain in the EU, compared to those put forward by David Cameron, or even some Labour politicians. The latter begin by viewing things from the perspective of what is best for Britain, by which they really mean, what is best for British businesses, not for British workers. But, workers found out, 200 years ago, that their interests are collective interests; interests shared by all workers, irrespective of what firm they work for, industry they work in, or where they live. They can best defend those interests when they are able to join together rather than compete against each other. That is why they created trades unions.

But, under capitalism, workers have to sell their labour-power, and as capitalism is a system based upon competition, that competition not only means that one firm competes with another, one industry with another and so on, but also workers themselves find that they too are forced into competing one with another in order to obtain work. It also means that one area of a country sometimes tries to gain advantage for the economy in that area at the expense of others. For example, in the 1980's, Local Councils were encouraged to compete against each other for government funds to set up Enterprise Zones. The zones were based on the idea of giving low paying, small firms advantages, by excusing them from various regulations, or paying business rates and so on. No wonder the UK economy today suffers from low levels of productivity, low pay and high levels of household debt, because that was the kind of backward looking economic model that Thatcher created.

What is worse, and most annoying, is that those kinds of conservative, backward looking policies are actually against the longer-term interests of the accumulation of capital and development of the productive forces. That is why, those policies, which seem rational from the perspective of each individual firm, particularly the small firms that depend on penny-pinching measures, and have a short-term outlook, lead to the kind of problems of low productivity, and high levels of household debt that holds back economic development that we see today.

Firms themselves understand that idea. They don't compete against each other if they can avoid it. There are lots of examples of collusion between firms to keep up prices, for example, even when its illegal! Its not just workers who recognised the benefit of joining together, and co-operating. Besides all of the various cartels, trade associations and so on, firms created organisations like the CBI, Chambers of Commerce and so on to pursue their collective interests. At an international level, capitalist countries formed collective organisations such as the IMF, the World Bank and so on. In fact, the EU itself represents such a collective organisation, just as the many similar economic and political blocs of countries being created in various parts of the globe, like NAFTA, Mercosur and so on, show that there is an underlying logic towards such larger scale collective organisation and co-operation.

Wherever, individual firms can, they try to get bigger, and take over other firms, so that they can reduce the competition they face. Workers have no interest in arguing for firms A,B and C to get together to form one big firm ABC Ltd, because what workers really need is for themselves to have ownership and control of those businesses, but if firms A, B and C do join together, workers within the new firm ABC Ltd. would have every reason to oppose it being broken up into individual small firms, because generally speaking, workers in larger firms are able to obtain better pay and conditions, because those firms are more efficient, but also the larger number of workers organised together within the firm are stronger than if they are divided into smaller competing businesses.

The argument that the EU itself is a capitalist club is not an argument for breaking it up, any more than workers would be in favour of breaking up a large business, into smaller, less efficient businesses that paid lower wages, and forced workers across those individual firms into competition with each other. In the 19th century, nation states were formed, which were themselves capitalist clubs that facilitated capitalist development within their borders. These nation states were required to create single markets, single currencies, taxes and so on that all businesses within their borders shared, so that they reduced a range of costs, and so that all businesses within their borders operated on the basis of a common set of laws, rules and regulations, so that they competed on a level playing field.

But, no rational person would propose that, because these nation states were created as capitalist clubs, that facilitated capitalist development, they should be broken up and that we should go back to smaller regional states, whereby Yorkshire competed with Lancashire, in a repeat of the Wars of the Roses, that there should be border controls between different counties, different currencies in each area and so on! The creation of these nation states was a vital part of the development of capitalism, but that development of capitalism is also a necessary condition for the development of the working-class, of the productive forces that we require to create Socialism. We are only opponents of capitalism, because we are impatient at its limitations, and slow progress, because we want to move forward, not because we want to turn the clock backwards to some more primitive era!

The EU, and other similar blocs being created across the globe represent simply the logical progression of that historical process, as capitalism has gone beyond the limits of national borders, with multinational firms operating in a range of countries across the globe. Rather than looking backwards, what workers need is more Europe, not less. Our complaint against the capitalists is that they are not developing the EU fast enough, as such a rational state. We need workers across Europe to come together to push that development forward, and in the process to do so by organising to defend their own interests, and to work towards the development of a new kind of European state that is based upon their interests.

Instead of people like Cameron and some Labour politicians talking about what is in “Britain's interest”, or even what is in “British workers' interests”, our interests, as workers, wherever we live, is in coming together in common organisations across the EU, to defend our common interests, and to promote the development of this different kind of Europe. We can only do that from inside, and on the basis of building those much bigger EU based organisations of workers. Just as workers organised in a big union are stronger than those organised in a smaller union, and as workers are stronger organised in a Confederation of Unions than in competing individual unions, so we are stronger as a single huge European working-class, working together in solidarity than in individual competing national divisions.

Co-operative International College

In the past, workers realised that too. In the 19th century, the more advanced workers across Europe created organisations such as the Communist League, and the First International. The Co-operative Movement in Britain, quickly took up the idea of internationalism, creating links with workers across Europe, and establishing the International Co-operative College. Later workers created the Second, and Third Internationals. But, more recently, workers extended the lessons they had learned in the trades unions on an international scale. A multinational company like Ford, or GM has workers at plants in a range of EU countries, as well as in the US and elsewhere. Workers created Combine Committees, so that Ford or GM workers in Britain could co-operate with their fellow workers in these other countries.

But, such co-operation will always be limited so long as firms are able to operate in different countries where different laws and so on are in existence. A good example of that, at the moment is with VW. In Germany, laws going back to the 19th century, but more developed since WWII, require large companies to have half of their supervisory boards comprised of workers elected by the trades unions. The VW unions in Germany, together with the UAW in the US, are demanding that the same requirement be met at the VW plant in Chattanooga. The move is being opposed in the US, because no such law exists there, and other big money-capitalists fear that if their power is undermined in this case, it will encourage workers in other large US companies to demand seats on the boards.

In the 1970's, the EU Commission drew up proposals for similar measures of industrial democracy across the EU. In the end, they were never developed, because like the similar proposals of the Bullock Report in the UK, they were shelved when conservative parties took over the reins of government. But, it is clearly in workers interests to be able to have such common laws established across a large area like the EU, than for workers in each country to have to fight for them separately, and for their own national parliaments to have to introduce such measures, because history shows that, if they are allowed to, each nation state will play off the workers in one country against another, and a race to the bottom ensues. Just look at the excuses that are raised over collecting taxes, where each country says, we can't implement a sensible tax policy, because if we do, firms will move elsewhere. An EU wide tax regime would make that impossible unless every firm wanted to undertake no business at all within the EU, the biggest single market on the planet!

That applies to a whole range of things. In the 19th century, individual firms were forced by competition to try to keep their workers employed for ridiculously long hours, and in poor conditions. Although Robert Owen showed at his factories in New Lanark that higher productivity could be achieved by other means, generally no individual firm was going to give an advantage to its competitors by employing its workers on higher wages, shorter hours, or better working conditions. Yet, it was extremely short sighted. Before the introduction of the Factory Acts, three generations of workers were killed off in the space of what was previously the lifespan of one. Workers life expectancy plummeted by half from around 50, to around 25, and population was only kept up by workers marrying from around the age of 12, and having large families, as well as the industrial population being topped up by migrants from the countryside.

The source of capitalist profits, the working-class, was being killed off by the short term drive for profits, driven by competition. It was often the state functionaries, such as the Factory Inspectors, cited by Marx, who were able to take a longer term rational view of what was in the interests of capitalist development, more so than the politicians, who had to get elected. But, it was legislation, such as the Factory Acts, which meant that the collective interests of capital in preserving the workforce were able to proceed, because they meant that a level playing field was established within which each firm had to operate. But, Marx also showed that in having to work within these minimum, civilised limits, the firms themselves had to come up with new innovative ideas, which also acted to raise productivity, which actually raised profits and made faster economic growth possible, at the same time as providing workers with better conditions, and pay. What applies in that regard within national borders applies across borders within the EU too.

Its not that the EU Commissioners are friends of workers, but the fact of establishing common laws, rules and regulations across the EU, makes it easier for firms in the EU to all accept them, compared to if firms in one country think they can gain a competitive advantage by avoiding them. Moreover, if tens of millions of workers stand together to demand such minimum standards, they are in a better bargaining position than if workers in Britain, or France, or Germany or Greece stand on their own to try to demand such standards. Marxists do not favour provision of welfare by the capitalist state, because we favour the workers themselves having ownership and control of the social insurance funds required for those purposes, but such welfare states already do exist across Europe. Our starting point, is not to call for them to be disbanded, but is that simple rationality calls for them to be provided as a single EU wide welfare state, provided on an equal footing to all EU workers wherever they live, and funded from a single EU social insurance fund.

One of the reasons that we have things such as the Working Time Directive, or the EU laws on Maternity and Paternity Leave and so on is not the generosity of the EU Commission, but is the fact that workers across Europe have pressed for those things. In fact, whilst workers in Britain were being beaten down by Thatcher, who introduced the anti-union laws, and a series of other measures to weaken workers rights, workers in France and elsewhere in Europe were winning the right to a 35 hour week and so on. That is under attack in France, at the moment, precisely on the basis, that employers there point to the need to worsen French workers conditions so as to compete with the lower conditions of workers in Britain. That would intensify if Britain were outside the EU. People like Farage and the Tory Right make no secret of the fact that one of their main reason for wanting out of the EU is to press ahead with a further attack on the rights and conditions of British workers. It shows that what we need is greater European integration, greater collective organisation of workers across the EU.

That can also be seen in respect of Greece, and other peripheral EU economies. The problems for Greece, Portugal, Spain, Ireland and so on were not caused by the EU, or by the Euro. They were caused by the measures of austerity introduced by conservative governments after 2010. Parties like Syriza and Podemos, and the Left Bloc have understood that, but they cannot defeat the forces of conservatism across Europe on their own. Left isolated, they will be defeated by that same power of competition driving division. Only solidarity of workers across Europe can prevent such isolation and division. The last thing we need is greater division, and any suggestion that workers could be stronger by voluntarily dividing their forces, and each seeking to gain their own national advantage.

Rather what we need now is trades unions organised on an EU wide basis; the national Trades Union confederations like the TUC, should be nothing more than the equivalent of the current regional bodies like the West Midlands TUC, with the central power residing within an EU Trades Union Congress. The same applies to the workers parties. It is high time we had a single European party of labour, call it a European Labour Party, European Socialist Party, or European Social-Democratic Party. The name is irrelevant, the point is that it should convey the idea that we are now one single European working-class with common interests, aims and objectives, and it should fight elections throughout the EU, at all levels, on that basis.

Workers should vote to remain because our interests are those of other European workers not of British bosses, our future lies in collective action with those other European workers, and in building a Workers' Europe, not in looking backwards to a capitalist Britain, or the utopian and reactionary idea that workers interests could be furthered within the constraints of national borders.

Capital III, Chapter 35 - Part 11

Marx quotes an exchange between Wilson and Newmarch. The latter points out that although there was a flow of silver from Britain to India, Britain in 1855 had a trade surplus with India of nearly £1.4 million. Wilson responds that India exports commodities to Australia and North America, and this trade is financed via London. He also argues that,

“... when India and China are considered together, the balance is against England, since China has constantly to make heavy payments to India for opium, and England has to make payments to China, so that the sums go by this circuitous route to India.” (p 579)

Wilson, at this point of the questioning, asks Newmarch whether it would not be the case that there would be the same effect on the exchange rate whether the capital went to India in the form of precious metal, or as rails or rolling stock?

“Newmarch correctly answers: 

"The £12 million which have been sent during the last few years to India for railway construction served to purchase an annuity which India has to pay at regular intervals to England. "But as far as regards the immediate operation on the bullion market, the investments of the £12 million would only be operative as far as bullion was required to be sent out for actual money disbursements."” (p 579)

Weguelin asks Newmarch how the provision of rails etc. could affect the exchange rate, if no payment is made for it? Newmarch replies that it does not affect the exchange rate because it could only be affected where there was no immediate flow of payments, be it of money, or via bills of exchange.

However, Newmarch points out this is not the case as regards a transfer of money-capital. Firstly, money would be withdrawn from circulation, in Britain, as part of the subscription, then this money would be put into circulation in India. It would go to pay wages, to buy materials and so on.

“... now, if the nature of the transaction was such that the whole of that £12,000,000 was required to be laid down in Calcutta, Bombay, and Madras in treasure ... a sudden demand would very violently operate upon the price of silver, and upon the exchange, just the same as if the India Company were to give notice tomorrow that their drafts were to be raised from £3,000,000 to £12,000,000.” (p 579)

However, he points out, half of this money could flow back to Britain for the purchase of rails and other material. But, that would only be money put into circulation in Britain, that had already been removed from circulation. Weguelin then comes back to ask whether then the production of these commodities in Britain would not itself require the import of large quantities of commodities, so that this would reduce the exchange rate? To which Newmarch agrees. 

Following on from this idea, Wilson believes that the production of iron, to a large extent, is solely down to labour, and so the production of iron rails would necessarily involve an increase in imports and deterioration of the exchange rate, as wages were spent on imported wage goods. But, Newmarch points out that this is what happened in the railway boom of the 1840's. £30 million was spent on railway construction, much of it going to cover wages, and the workers spent some of this on tea and sugar, and other imported commodities. More workers were, in fact, employed in this railway construction, during this period, than were employed in the rest of industry combined. Yet, despite the fact that these workers were spending money to buy imported commodities, whilst producing no commodities to be exported, in exchange, there was an influx of precious metal. The exchange rate moved in favour of Britain, not against it.

However, I'm not entirely sure what point Marx is really trying to make here in quoting Newmarch's evidence. It clearly was not the case that there was this improvement in Britain's exchange rate and an influx of bullion because of the expenditure on railway construction. The influx was due to the fact that the rest of British industry was exporting on a massive scale, large enough to more than offset the imports. There seems to be no obvious connection between the two, other than a peripheral one that workers employed in railway construction also created a demand for British made goods, which facilitated capital accumulation and production on a larger scale , which meant lower cost production, and greater international competitiveness. Railways may also have facilitated that by creating larger domestic markets, and reducing distribution costs and turnover time, but only when they were completed.

If we were to isolate the two phenomenon, then it would seem undeniable that an advance of variable capital, which is used as wages to buy imported commodities, but which does not result in the production of commodities that are exported, to at least an equal value, must result in a deterioration of the trade balance, and thereby the exchange rate. The only way the latter would not arise, is if the financing of the railway construction came from external investment, causing an inflow of money-capital, for example, to buy railway company shares.

The point that Marx seems to be making is only that you cannot take any phenomenon on its own, and say this must result in a deterioration of the exchange rate, because other phenomenon may be having an opposite effect. But, that seems a weak point to make, because throughout Capital, he has demonstrated the way individual phenomenon, taken in isolation, have particular effects, even if he has then gone on to show how those effects are negated by other, often related phenomenon.

For example, if wages fall this will result in profits and the rate of profit rising. Does this mean that a fall in wages must be followed by a rise in the rate of profit? No, because independently the price of constant capital may rise, so that even a large mass of profit represents a lower rate, as against this higher value of constant capital. Yet, it remains the case that a reduction in wages, all other things being the same, produces a higher rate of profit, just as, all other things being equal, a higher price of constant capital, causes the rate of profit to fall.

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Capital III, Chapter 35 - Part 10

The rate of interest is a function of the demand and supply for money-capital. But, both the demand and supply of money-capital are, at least in part, a function of the rate and mass of profit. If production is expanding because an increased rate and mass of profit provides the surplus value for accumulation, and the incentive for that accumulation, whether the rate of interest rises or falls, or stays the same, will depend on how much this increase in profits provokes increased demand for money-capital compared with how much that very increase in profits has raised the supply of money-capital.

Simply the normal expansion of production that arises from the accumulation of surplus value, could provide the additional rails invested in India, without this requiring any additional demand for money-capital. Similarly, the increase in surplus value of A, who cannot use it immediately, may then lead to it being provided to B who requires bank credit, to cover short term payments, or money-capital to fund expansion. But, there is no reason for this to result in higher interest rates, as the additional demand for bank credit, and money-capital was matched by an equal increase in its provision.

In other words, it does not matter whether the output of this increased production is consumed in Britain or in India. The additional surplus value produced, can equally be the source of additional supply of money-capital, as a cause of its additional demand. However, if Britain supplied rails to India as commodities, which were bought and paid for by Indian companies, this would have a different effect than if the rails were supplied as capital. In the first instance, bills of exchange are drawn on India and payment flows to Britain, which means the exchange rate moves in Britain's favour. The increased supply of money-capital into Britain, from these payments acts to push interest rates down. But, if the rails are supplied as capital, no payment is made in the short run, so no effect occurs on the exchange rate or interest rate.  Instead, payments flow back, over time, in the form of interest on this capital value of the rails.

Finally, it could be the case that commodities have been exported on the basis of credit, and the potential for further exports on this basis has run out. In that case, in order to keep production going, they may be supplied as capital not commodities. In other words, rather than in return for payment they are supplied on the basis of a share in future profits. A similar thing occurs today with foreign aid, where country A provides aid to country B, but where this is tied to country B using the aid to buy commodities from companies in country A.

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Northern Soul Classics - Check Yourself - Gene Chandler

The magic of Chene Chandler.

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Capital III, Chapter 35 - Part 9

Marx then quotes the evidence of a number of witnesses to the Commons Committee of 1857 on the Bank Acts, of how the change in interest rates operates.

John Stuart Mill commented that the prices of securities fell. That follows naturally as the prices of this fictitious capital is determined by their capitalised revenue.  This meant foreign buyers would come in to buy bonds, shares etc. and British owners of foreign securities would sell them, to buy the now cheaper British alternatives. The consequence would be an influx of gold for these purchases.

“"2182. A large and rich class of bankers and dealers in securities, through whom the equalisation of the rate of interest and the equalisation of commercial pressure between different countries usually takes place ... are always on the look out to buy securities which are likely to rise.... The place for them to buy securities will be the country which is sending bullion away."” (p 575)

J.G. Hubbard made a similar point, and when asked whether this didn't mean that countries that sold securities to foreigners on this basis, were thereby in considerable debt to them commented,

“Very largely.” (p 576)

Similarly today, the US and other western economies are very largely in debt to China and other surplus economies that have bought large quantities of their securities.

Marx then sets out how Britain used its dominant position to recoup losses from other countries, when the rate of exchange with Asia was unfavourable. The US does something similar today, in being able to use the role of the dollar as global reserve currency. Marx also sets out the difference between the export of precious metal, as money-capital and the export of other commodities.

“... Mr. Wilson once again makes the foolish attempt here to identify the effects of the export of precious metal on the rates of exchange with the effect of the export of capital in general upon these rates; the export being in both cases not as a means of paying or buying, but for capital investment.” (p 576-7)

On the one hand, if Britain sends £10 million to India, as precious metal, or in iron rails, as an investment in Indian railways, this represents a movement of capital. In both cases there is no immediate equivalent return of value. The only return of value is the longer term revenue that results from this investment. However, if the conditions described previously exist, where it is only the marginal movement of money-capital, which is required to affect interest rates, then the transfer of precious metal will have a different consequence than the shipment of rails, precisely because the precious metal is loanable money-capital, but the iron rails are not.

The reason precious metal is sent to India, is because the demand for bills of exchange, drawn on India, exceed their supply. In other words, not enough British commodities have been sold to India to generate a sufficient trade surplus, so that the investment could be balanced against it. For example, country A sells £100 million of commodities to country B, and draws bills of exchange against B to this amount. Country A says, I will invest £100 million in country B's railways. But, instead of country A having to make any payment to country B, it simply sets it off against the bills of exchange. However, if country A invests £120 million in B's railways, it will have to ship £20 million to country B to cover the difference.

As a result, this has an effect on the exchange rate, not because A is in debt to B, but because, in the short term, it is making these large payments.  These payments to cover investments are conducted on the capital account rather than the current account.  As I pointed out recently, these movements of capital can have what appear to be perverse consequences at first sight.  For example, the mechanism described above is that where the central bank raises interest rates, to raise the value of the currency, it causes a reduction in the value of the country's financial assets, which then attracts an inflow of capital, as speculators seek the higher yield now offered by those assets.

However, over the last 25 years, those speculators have come to seek capital gain rather than yield, and they have been encouraged in that view by the action of central banks who have continually intervened to ensure that the prices of those financial assets only ever rise.  So, when a central bank raises interest rates, or is thought to be about to raise interest rates, it can cause an outflow of funds, as speculators fear that they may make significant capital losses on the fictitious capital they own, at a time, when the amount of yield they obtain is negligible anyway.  So, they may take money out of that country and place it elsewhere, where they think that the central bank is about to cut rates, and boost the prices of fictitious capital.  So, we have seen several occasions where, having cut official interest rates, the value of the currency has risen, rather than fallen.

“In the long run, such a shipment of precious metal to India must have the effect of increasing the Indian demand for English commodities, because it indirectly increases the consuming power of India for European goods. But, if the capital is shipped in the form of rails, etc., it cannot have any influence on the rates of exchange, since India has no return payment to make for it. Precisely for this reason, it need not have any influence on the money-market.” (p 577)

Marx makes the point that this causes an increased demand for British commodities, here, only because Britain was the major manufacturing economy. But, of course, an influx of money-capital into an economy of this kind may result in increased consumption that benefits a range of economies, including the domestic economy. For example, as this increased money-capital began to circulate in India, there is no reason that the increased consumption could not have simply been met by domestic producers. Its not that the country supplying the additional money-capital is automatically the beneficiary of the level of consumption, only that here Britain would have been likely to have benefited, and part of the reason for that would also have been the reduction in the value of the Pound relative to the Rupee, as a result of the transaction, i.e. British commodities would have become cheaper in Rupees.

“But, if the capital is shipped in the form of rails, etc., it cannot have any influence on the rates of exchange, since India has no return payment to make for it. Precisely for this reason, it need not have any influence on the money-market.” (p 577)

In other words, if Britain invests £10 million in Indian railways, by the transfer of money-capital, and this money-capital is used to buy rails produced in India, this money circulates in India, as wages and profits, rents and taxes etc., to those involved in producing the rails, and those producing commodities sold to them. However, if Britain invests £10 million in Indian railways by producing the rails themselves, no such circulation of money-capital in India occurs. But, similarly, there is no increased Indian consumption of British commodities nor any effect on the exchange rate, because no transfer of money-capital has occurred.

“Wilson seeks to establish the existence of such an influence by declaring that such an extra expenditure would bring about an additional demand for money accommodation and would thus influence the interest rate. This may be the case; but to maintain that it must take place under all circumstances is totally wrong. No matter where the rails are shipped and whether laid on English or Indian soil, they represent nothing but a definite expansion of English production in a particular sphere. To contend that an expansion of production, even within very broad limits, cannot take place without driving up the interest rate, is absurd. Money accommodation, i.e., the amount of business transacted which includes credit operations, may grow; but these credit operations can increase while the interest rate remains unchanged. This was actually the case during the railway mania in England in the forties. The interest rate did not rise. And it is evident that, so far as actual capital is concerned, in this case commodities, the effect on the money-market will be just the same, whether these commodities are destined for foreign countries or for domestic consumption. It could only make a difference when capital investments by England in foreign countries exerted a restraining influence upon its commercial exports, i.e., exports for which payment must be made, thus giving rise to a return flow, or to the extent that these capital investments are already general symptoms indicating the over-expansion of credit and the initiation of swindling operations.(p 577-8)

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Capital III, Chapter 35 - Part 8

In reality, even if the pound falls relative to the Euro or other currencies, this may not result in a higher value of exports and lower value of imports. For example, Britain is highly dependent on imports of food and fuel. If the value of the pound falls against the dollar, in which many of these commodities are priced, Britain will still need to import the same quantity, but now at this higher price. So the value of imports will rise not fall. This is part of the so called “J” Curve effect, whereby, as a result of a change in the exchange rate, the balance of trade may move in the opposite direction of that required, for a time, before the necessary adjustments occur. In the past, when Britain was a significant manufacturer, it also depended on large quantities of imported materials. A fall in the value of the pound might only mean that the sterling price of these materials rose, and this higher input cost would also then be passed on into the cost of the end product.

Moreover, to the extent that imported commodities are wage goods, these higher domestic prices raise the value of labour-power, and thereby reduce surplus value. Today, this is significant because large quantities of wage goods are imported from China. Over the last thirty years, this has acted to reduce the value of labour-power, but now, productivity growth in China is slowing, whilst wages are rising. Although Chinese manufactured commodities remain competitive as against similar commodities produced in Europe, so there is little chance of import substitution, their prices are rising and will rise more in domestic currency terms, if the pound and Euro fall against the Renminbi.

This means significant pressure on inflation will rise. Now, as in the time Marx and Engels were writing, the solution to this situation is then to raise the interest rate. Although the myth has been created that central banks dictate the interest rate, as Marx has described above, it is the price of money-capital, and thereby determined by the market, not by central bank planners. As inflation rises, the suppliers of money-capital automatically demand higher rates of interest to cover themselves against the future reduced value of their capital, and the interest paid on it.

“When the drain on gold is considerable, the money-market as a rule becomes tight, that is, the demand for loan capital in the form of money significantly exceeds the supply and the higher interest rate follows quite naturally from this; the discount rate fixed by the Bank of England corresponds to this situation and asserts itself on the market.” (p 575)

Engels describes the situation where there is a gold drain not due to a trade deficit, but due to investment or loans by Britain made in gold. This would not justify any rise in the interest rate. In this case,

“... the Bank of England must then first "make money scarce," as the phrase goes, through heavy loans in the "open market" and thus artificially create a situation which justifies, or renders necessary, a rise in the interest rate; such a manoeuvre becomes more difficult from year to year.” (p 575)

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Capital III, Chapter 35 - Part 7

II. THE RATE OF EXCHANGE

Engels describes the mechanism thus.

“The rate of exchange is known to be the barometer for the international movement of money metals. If England has more payments to make to Germany than Germany to England, the price of marks, expressed in sterling, rises in London, and the price of sterling, expressed in marks, falls in Hamburg and Berlin. If this preponderance of England's payment obligations towards Germany is not balanced again, for instance, by a preponderance of purchases by Germany in England, the sterling price of bills of exchange in marks on Germany must rise to the point where it will pay to send metal (gold coin or bullion) from England to Germany in payment of obligations, instead of sending bills of exchange. This is the typical course of events.” (p 574-5)

Today, with floating exchange rates, if Britain has more payments to make to the eurozone, than the Eurozone has to make to Britain, the value of the Pound will fall relative to the Euro. As a result, Eurozone imports will become more expensive, in Pounds, and, therefore, demand for them will fall, whilst British exports become cheaper in Euros, and so demand for them will rise.

“If this export of precious metal assumes a larger scope and lasts for a longer period, then the English bank reserve is affected, and the English money-market, particularly the Bank of England, must take protective measures. These consist mainly, as we have already seen, in raising the interest rate.” (p 575)

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Capital III, Chapter 35 - Part 6

There is also a parallel with current arguments over austerity in Marx’s critique of the Currency School here. On the one hand, the actual amount of gold drain involved, as just seen, was relatively small. Yet, in order to prevent or reverse this drain, the authorities were prepared to cause the destruction of large amounts of real capital and real wealth.

The same is true today in terms of the arguments over austerity. As a result of the huge rise in the rate and mass of profit over the last thirty years, the supply of money-capital has so exceeded the demand that interest rates were reduced to levels not seen in three hundred years. But, when the speculation that resulted from this led to the financial crisis of 2008, in order to protect the banks, and the fictitious capital on which they rest, the authorities in the UK and parts of Europe, instead of allowing the destruction of this fictitious capital, introduced austerity measures that destroyed real capital and real wealth.  I have described this, and why it means a new financial crisis is inevitable, in my book, Marx and Engels' Theories of Crisis. 

“So long as enlightened economy treats "of capital" ex professo, it looks down upon gold and silver with the greatest disdain, considering them as the most indifferent and useless form of capital. But as soon as it treats of the banking system, everything is reversed, and gold and silver become capital par excellence, for whose preservation every other form of capital and labour is to be sacrificed.” (p 573)

As Engels points out, under developed capitalist production, wealth assumes the form not of the real social wealth, the physical productive-capital, that actually produces things, but the form of the private wealth of individuals, which is, in reality, wholly fictitious; money in paper form is merely paper that offers a claim on future labour-time that may never be provided; share certificates produce nothing, and ultimately have no more real value than the paper they are printed on, if the underlying assets are destroyed; the same is true of bonds and other financial instruments.

Yet, it is this fictitious wealth that the measures of austerity, along with increased money printing, were designed to protect, whilst at the same time, destroying real social wealth and capital.

“This social existence of wealth therefore assumes the aspect of a world beyond, of a thing, matter, commodity, alongside of and external to the real elements of social wealth. So long as production is in a state of flux this is forgotten. Credit, likewise a social form of wealth, crowds out money and usurps its place. It is faith in the social character of production which allows the money-form of products to assume the aspect of something that is only evanescent and ideal, something merely imaginative. But as soon as credit is shaken — and this phase of necessity always appears in the modern industrial cycle — all the real wealth is to be actually and suddenly transformed into money, into gold and silver — a mad demand, which, however, grows necessarily out of the system itself. And all the gold and silver which is supposed to satisfy these enormous demands amounts to but a few millions in the vaults of the Bank.” (p 573-4)

This then illustrates the extent to which, although the production of wealth is a social act, that relies on the co-operative labour of millions of workers, via the division of labour, control over that wealth is not yet social. In order to protect the fictitious wealth of a few, the real wealth of society is destroyed.

“But only in the capitalist system of production does this become apparent in the most striking and grotesque form of absurd contradiction and paradox, because, in the first place, production for direct use-value, for consumption by the producers themselves, is most completely eliminated under the capitalist system, so that wealth exists only as a social process expressed as the intertwining of production and circulation; and secondly, with the development of the credit system, capitalist production continually strives to overcome the metal barrier, which is simultaneously a material and imaginative barrier of wealth and its movement, but again and again it breaks its back on this barrier. 

In the crisis, the demand is made that all bills of exchange, securities and commodities shall be simultaneously convertible into bank money, and all this bank money, in turn, into gold.” (p 574)

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Capital III, Chapter 35 - Part 5

Marx continues to describe the conditions that cause this to impact interest rates and the movement of precious metal.

“Furthermore, as soon as somewhat threatening conditions induce the bank to raise its discount rate — whereby the probability exists at the same time that the bank will cut down the running time of the bills to be discounted by it — the general apprehension spreads that this will rise in crescendo. Everyone, and above all the credit swindler, will therefore strive to discount the future and have as many means of credit as possible at his command at the given time.” (p 571)

Its not the volume of precious metal that moves, which creates this effect. It is essentially three factors. Firstly, Marx distinguishes the difference between the export of precious metal and any other commodity. The difference is that the precious metal acts as money-capital, and thereby affects the demand and supply of money-capital, which determines interest rates. Secondly, it depends on the other prevailing economic conditions as to what effect such a movement will have on interest rates. But, finally, Marx again demonstrates that he was way ahead of the Marginal School, in his economic thinking, because he points out that it is not the absolute amount of movement that counts, but the movement at the margin.

“... by acting like a feather which, when added to the weight on the scales, suffices to tip the oscillating balance definitely to one side;” (p 571)

Otherwise, its inexplicable, Marx says, why such relatively small movements would have any consequence. The most that was drained from Britain, was between £5 – 8 million, compared to £70 million of gold that circulated within the British economy.

“But it is precisely the development of the credit and banking system, which tends, on the one hand, to press all money-capital into the service of production (or what amounts to the same thing, to transform all money income into capital), and which, on the other hand, reduces the metal reserve to a minimum in a certain phase of the cycle, so that it can no longer perform the functions for which it is intended — it is the developed credit and banking system which creates this over-sensitiveness of the whole organism. At less developed stages of production, the decrease or increase of the hoard below or above its average level is a relatively insignificant matter. Similarly, on the other hand, even a very considerable drain of gold is relatively ineffective if it does not occur in the critical period of the industrial cycle.” (p 572)

In other words, as seen in previous chapters, what the credit system and development of banking does is to reduce the ability of any money to simply remain inactive. Where, in the past, the wages of workers might have been simply sat waiting to be spent, now even these small amounts of income, amassed by the banks, became money-capital, constantly in search of the highest yield. And, because this supply is then constantly fully committed, any changes in its level have proportionately greater effects.

“In the given explanation we have not considered cases in which a drain of gold takes place as a result of crop failures, etc. In such cases the large and sudden disturbance of the equilibrium of production, which is expressed by this drain, requires no further explanation as to its effect. This effect is that much greater the more such a disturbance occurs in a period when production is in full swing.” (p 572)

During such periods of boom, the demand for money-capital is necessarily high, although supply may also be high. A drain of gold, to pay for food imports, may, therefore, swing this balance to push rates much higher, but, whether this will be decisive depends on the profits being made, and on whether the rise in interest rates goes along with an actual shortage of money.

If profits are high, firms may be able to simply pay the higher interest rates, so long as they obtain the credit required, and there is sufficient liquidity to enable commodity circulation to continue. The problem in 1847 and 1857 was that liquidity itself dried up, due to the provisions of the Bank Act.

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Osborne Understates The Effect of Brexit on Property Prices

On Friday, in Japan, George Osborne, on the basis of a report to be published, next week, by the OBR, said UK house prices could be up to 18% lower by 2018, if the UK votes to leave the EU. As some commentators have said last week, that could be a good reason for people to vote to leave, rather remain! If you live in the South of England, where house prices have become particularly astronomical, and the prospect of buying has become ever more remote, the idea that property prices might drop, so that you could have a chance of buying, for the first time, or moving up to a better house, might be tempting.

Of course, the Brexiteers have denied Osborne and the OBR's claims, because they are the purest representatives of those traditional conservative forces of the landed and financial aristocracy. Moreover, they are relying on the votes of all those older people, who read the Daily Mail and Express, and who for years have been hoodwinked into the idea that rising house prices have made them better off, rather than, as with any rising prices, made them significantly worse off! The Brexiteers may even have miscalculated there though, because the latest polls show that a majority of people now see high and rising house prices as a bad thing, as it gradually sinks into people that their kids can't afford a house, and that they can't themselves afford to move up to a better house. Who would have thought that when things that workers have to buy get a lot more expensive, that workers get much poorer rather than richer as a result?!

The Brexiteers have brought out a range of people to claim that even if the Pound falls, and mortgage rates rise, house prices will continue to go up, because the demand for houses continues to rise. But, that is just bad economics from some economists who should know the difference between need and demand. There is a big difference between the need for housing continuing to rise, because population grows, and the structure of families change, and that translating into a demand for houses. I might feel that I have a need for a Lamborghini, but unless I have the money and willingness to use it to buy one, that need does not become a demand. The same with houses, there may be many people who need a house, but unless they have the money to put down a deposit, to be able to pay the monthly mortgage interest and so on, that need does not constitute a demand. 

Just look at all the homeless people. They undoubtedly need a home, and the more homelessness rises, the more that need for a home rises. But, it does not constitute a demand, precisely because all those homeless people, and millions more in only a marginally better position, do not have the wealth or income to be able to turn that need into a demand. Market prices respond to the interaction of supply and demand not supply and social need! Its only if people have the money to be able to actually demand houses that it can have an effect of pushing up house prices. Currently, an increasing number of people lack the money to be able to provide such demand, and that is illustrated by the continued fall in home ownership, reversing a trend that had existed for decades.

The figures for the numbers of houses being bought are themselves deceptive, but an increasing proportion of the houses that have been bought, particularly of cheaper houses, have been by “Buy To Let” landlords. In fact, that has been one factor keeping the property bubble inflated, and making it harder for people to get on to the housing ladder, as the NEF showed recently. The Buy To Letters have have tax advantages over other house buyers, because they can set off half their mortgage interest payments against income for tax purposes. It used to be all of the interest until the last Budget. They push up the prices of entry level properties, which makes it more difficult for real first time buyers to buy them.

But, as I showed some time ago, the demand side of the equation is deceptive, and open to a quick reversal. For example, if there is a Brexit, there may not only be fewer migrants coming to the country, but many of those here may leave. That would mean lots of current rentals will disappear, and those migrants who had been able to buy a house, will then be sellers. But, the supply side is deceptive too. Not only would any such moves throw a large amount of existing rental property on to the market, but the fact is that the amount of available housing per person is already 50% higher than it was in the 1970's.

In fact, Osborne's statement, rather than exaggerating the potential effect on house prices understates it. The effect has been based upon the likely effect of a rise in interest rates affecting mortgage rates, and the deterrent effect that will have on potential buyers. That is undoubtedly one effect, as will be the huge numbers of existing home-owners who do not realise just how much a small percentage point movement in mortgage rates will add to their monthly repayments. For example, if you have a £100,000 mortgage and your current mortgage rate is 4%, the interest is £4,000 a year, or £333 per month. If the mortgage rate rises to just 6%, your monthly interest payment will rise by 50% to £500 per month.

For many people, already borderline in being able to meet their monthly outgoings, that kind of rise in monthly payments will be impossible. But, mortgage rates could rise much more than that from their historically low levels, and that is even without Brexit. Global interest rates are rising, and they will rise here too. Brexit will just mean that they rise faster.

However, the real reason that higher interest rates cause property prices to drop is not this effect on affordability of mortgages. The real reason is because of the process of capitalisation, which is the means by which revenue producing assets such as land are priced. If interest rates double then basically the prices of such assets halve. If the price of an acre of land is currently £100,000, if interest rates double from say 1.4% (the yield on the UK 10 Year Gilt) to 2.8%, then the price of the land falls to £50,000.

As the NEF video shows, 90% of the rise in the price of new homes is accounted for by higher land prices. There is a chicken and egg situation here. Speculation over existing houses, fuelled by lax credit has pushed up the prices of those houses. In the process, the higher prices of these existing houses, pushes up land prices, and higher land prices, pushes up the cost of building new houses. Higher prices of new houses, also means that demand for those houses is choked off, because potential buyers cannot afford them – pace the point made at the start about the difference between need and demand – so builders will only build a small number of new houses that they know they can sell. That means the supply of houses grows only slowly, which is why the number of new houses being built is at historically low levels, despite astronomically high house prices.

That, in fact, is the most obvious refutation of the claim that high house prices reflects a high level of demand relative to supply. If that were the case, then housebuilders would be making huge profits from building new houses, and would be falling over themselves to build as many as they could. They are not, and the reason they are not is because there actually is not significant demand for houses at their current ludicrously high prices. That means that if builders built more they would have to sell them at lower prices, which would mean they would make no profit on them.

So, builders prefer to sit on their own huge land banks, and landowners sit on huge tracts of land that could be used for building. That keeps land prices high, which keeps the cost of building new houses high, which means that house prices in general stay high. Unless the state were to nationalise or compulsory purchase large tracts of land, at low prices, so as to make it available for building, the only way to resolve this problem is for interest rates to rise, so that existing house prices are crushed, and so that then land prices also fall.

Global interest rates are rising, and such a process of crashing asset prices is inevitable, but if it continues to look like Brexit is possible that process will be brought forward and intensified. A Sterling crisis is inevitable if Brexit looks likely, and that will push up inflation and interest rates. The Bank of England will be powerless in such circumstances. Firstly, with a collapsing Pound it will have to intervene to shore it up with higher official interest rates, not reduce them. Secondly, it may be able to step in to buy up even more UK Gilts, but only at the cost of pushing up inflation even higher, and encouraging foreign holders of those gilts, and other sterling denominated bonds to sell them, as they fear the value of those assets depreciating, due to inflation.

Moreover, as I pointed out some time ago, the Brexiteers have the wrong end of the stick when it comes to trade. The EU will indeed want to continue to sell to UK consumers, and those consumers will want to continue to buy EU commodities. The problem is that the UK will find it increasingly difficult to cover the cost of those imports by its own exports. That will be not because of formal EU tariffs on UK goods, but because UK producers will find that their costs rise relative to EU producers. Moreover, EU based companies like BMW will site their production in EU countries rather than Britain. Where currently BMW Minis go out from Cowley to the EU, they would instead be produced in Germany and be imported to the UK.

The UK already has a huge trade deficit, because of decades of neglect from the Thatcher years onwards, that has left UK industry under invested and under capitalised, with falling levels of productivity, increasingly unable to compete on the world market. That will intensify, and so the UK will find itself increasingly paying for its imports by shipping capital rather than commodities abroad. As capital, thereby drains out of the economy, the value of the currency is forced down, and increasing austerity is required within the domestic economy.

Far from overstating the effects of Brexit, Osborne and the OBR are understating it.