Sunday, 8 May 2016

Capital III, Chapter 33 - Part 10

The ability of some of the larger money sharks to shape the market, by the extent of the capital they could mobilise was referred to earlier. But, the largest concentration of such financial muscle belonged to the Bank of England. Marx comments that its ability to utilise this muscle was constrained by its semi-governmental status. At that time, the Bank of England had private shareholders who drew dividends from it. It was only nationalised in 1946. But, at the time Marx was writing, it still operated as the central bank, the bank of the British state, and under legislation such as the 1844 Bank Act. Today, rather than being constrained in using such muscle, it has become a central aspect of implementing monetary policy, and thereby macro-economic planning and regulation.

Marx quotes Newmarch whose estimate of the firepower of the Bank of England may have been conservative.

“"I satisfied myself that the amount of funds constantly employed in the [London] money-market may be described as something like £120,000,000; and of that £120,000,000 a very considerable proportion, something like 15 or 20 per cent, is wielded by the Bank of England."” (p 541)

Moreover, the Bank had the ability to create additional fictitious money-capital, i.e. to issue bank notes that were not backed by gold, and via their issue to make profits on them.

“The same is true, of course, for private banks issuing notes. In his replies Nos. 1866 to 1868, Newmarch considers two-thirds of all bank-notes issued by them (the last third has to be covered by bullion reserve in these banks) as "the creation of so much capital", because this amount of coin is saved.” (p 541-2)

The large private money-capitalists, as seen earlier, could create financial panic, and drive up interest rates, by selling a large amount of bills in their possession, and thereby draining money from circulation. The Bank of England could do the same thing, and could increase liquidity by buying bills from the commercial banks. This was the basis of its open market operations for influencing the tightness or looseness of liquidity, and of interest rates. It is also the basis of QE, with the central bank creating new money tokens, electronic money tokens today, as the means of buying these bills, rather than using its existing reserves and deposits for that purpose.

But, in Marx's day, as now, the Bank of England could also regulate the market rate of interest by the setting of official interest rates.

“The power of the Bank of England is revealed by its regulation of the market rate of interest. In times of normal activity, it may happen that the Bank cannot prevent a moderate drain of gold from its bullion reserve by raising the discount rate because the demand for means of payment is satisfied by private banks, stock banks and bill-brokers, who have gained considerably in capital power during the last thirty years. In such case, the Bank of England must have recourse to other means. But the statement made by banker Glyn (of Glyn, Mills, Currie & Co.) before the C. D. 1848/57 still holds good for critical periods: 

"1709. Under circumstances of great pressure upon the country the Bank of England commands the rate of interest." — "1740. In times of extraordinary pressure ... whenever the discounts of the private bankers or brokers become comparatively limited, they fall upon the Bank of England, and then it is that the Bank of England has the power of commanding the market rate."” (p 542-3)

This power only existed temporarily, and under such conditions. Moreover, then as now this was only an ability to regulate rather than dictate the average rate of interest. As Marx has already set out, that average rate of interest is determined by the demand and supply for money-capital, and thereby not in the gift of the central bank.

As Engels sets out in a note.

“At the general meeting of stockholders of the Union Bank of London on January 17, 1894, President Ritchie relates that the Bank of England raised the discount in 1893 from 2½% in July to 3 and 4% in August, and since it lost within four weeks fully £4½ million in gold despite this, it raised the bank-rate to 5%, whereupon gold flowed back to it and the bank rate was reduced to 4% in September and then to 3% in October. But this bank-rate was not recognised in the market. "When the bank-rate was 5%, the discount rate was 3½%, and the rate for money 2½%; when the bank-rate fell to 4%, the discount rate was 2 3/8% and the money rate 1¾%; when the bank-rate was 3%, the discount rate fell to 1½% and the money rate to something below that."(Daily News, January 18, 1894.) (Note 12, p 542-3)

Moreover, the power of the Bank here related to conditions whereby, in a situation of existing stringency, it sought to tighten monetary policy further and to raise interest rates rather than the reverse, which is the intention of QE. As already set out, the effect of monetary policy is not symmetrical. Because money-capital necessarily takes the form of money, a restriction of the money commodity, or money tokens, necessarily restricts the supply of money-capital. But, simply increasing the supply of money, or money tokens is not at all the same thing as increasing the supply of money-capital, because there is no basis for assuming that this money or money tokens will be converted into loanable money capital.

On the one hand, it may sit in bank deposits, on the other it may be used as revenue, pushing up the money prices of the commodities it buys.

“But it is a serious event in business life nevertheless when, in time of stringency, the Bank of England puts on the screw, as the saying goes, that is, when it raises still higher the interest rate which is already above average.” (p 543)

The consequence is large swings in the rate of interest, and in the prices of assets. But, it is on the basis of such swings that the speculators make their money. If bond and stock market prices never changed, or changed very little, there would be no possibility for speculation to obtain capital gains, and they would have to settle for whatever interest they could obtain on their loans.

“But, says friend Samuel Gurney, 

"The great fluctuations in the rate of interest are advantageous to bankers and dealers in money — all fluctuations in trade are advantageous to the knowing man."” (p 544)

And, as seen earlier, although the actions of the Bank of England were constrained, as a semi-government institution, its own operations were very lucrative for its directors and shareholders. These actions benefited the speculators and money-capitalists, at the expense of the real economy and industrial capital, just as today, QE has that same effect.

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.” (p 544-5)

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