Sunday, 1 May 2016

Capital III, Chapter 33 - Part 3

Meanwhile, as was shown in Capital I, Chapter III, the amount of money in banknotes used in wholesale trade had been reduced considerably. As the merchants dealt with each other on the basis of mutual credits.

“According to the testimony of W. Newmarch before the Bank Committee 1857, No. 1741, other circumstances also contributed to economy in the circulating medium: penny postage, railways, telegraphy, in short, the improved means of communication; thus England can now carry on five to six times more business with about the same circulation of bank-notes. This is also essentially due to the withdrawal from circulation of notes of higher denomination than £10.” (p 523)

The introduction of the Internet, and of electronic payments systems, whether of debit and credit cards, electronic banking and transfers, mobile phone payments, and so on, have revolutionised that even further. The latest ideas even involve the implantation of chips, under the skin, so that payments can be made by a simple swipe of the hand.

“From these figures alone, it is evident that banks issuing notes can by no means increase the number of circulating notes at will, as long as these notes are at all times exchangeable for money.” (p 523)

That was true at the time when all of these notes were convertible into money, i.e. gold and silver.

“The quantity of circulating notes is regulated by the turnover requirements, and every superfluous note wends its way back immediately to the issuer.” (p 524)

But, as Engels points out, in a note, this does not apply where the banknotes are not convertible, but circulate solely on the basis of being backed by the state, i.e. fiat currency. In that case, the laws set out in Capital I, Chapter III, and in A Contribution To The Critique of Political Economy, apply.

In a discussion relevant today, Marx relates the comments of the Governor of the Bank of England, Neave, concerning the amount of notes required in circulation. He also quotes Tooke's testimony.

“"The Bank has no power of its own volition to extend the amount of its circulation in the hands of the public; but it has the power of reducing the amount of the notes in the hands of the public, not however without a very violent operation."” (p 524)

This shows the asymmetric nature of monetary policy. On the one hand, the central bank can always reduce the amount of money in circulation as happened in 1847, in accordance with the requirements of the Bank Act. It can raise interest rates, reduce its discounting operations, and so on. But, although it can attempt to put more currency into circulation, by the opposite of such actions, it cannot guarantee that the public will actually demand the currency so made available. As Keynes put it, without that demand for it, it becomes like pushing on a piece of string. Moreover, as QE has shown, even if it is demanded, there is no guarantee of where it will go. Rather than going into circulation to stimulate economic activity, it may simply go to inflate asset price bubbles, and, in so doing, turns them into financial black holes whose gravitational pull sucks out liquidity from general circulation, leading to commodity price deflation.

There was concern over this issue, because in the 18th century, and early part of the 19th century, there had been a number of financial crises, and bank failures, caused by private banks issuing excessive amounts of banknotes, beyond what they could cover with gold and silver. They were now limited in such issues, and only the Bank of England was able to issue non-convertible notes.

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