Monday, 2 May 2016

Capital III, Chapter 33 - Part 4

Its been noted previously that, irrespective of changes in economic conditions, the requirement for currency varies during the year. For example, at times when various settlement days fall, more currency is required to cover these payments.

“Thus, in August of every year a few millions, generally in gold, pass from the Bank of England into domestic circulation to pay the harvest expenses; since wages are the principal payments to be made here, bank-notes are less serviceable in England for this purpose. By the close of the year this money has streamed back to the Bank. In Scotland, there are almost nothing but one-pound notes instead of sovereigns; here, then, the note circulation is expanded in the corresponding situation, namely, twice a year — in May and November — from 3 million to 4 million; after a fortnight the return flow begins, and is almost completed in one month. (Anderson, C. D. 1848/57, Nos. 3595-3600.)” (p 526) 

Every three months there was additional demand for liquidity as payments of interest on government bonds fell due. These payments then flowed back to the banks, but Marx points out, more enduring, in terms of the actual circulation, was the effect of the industrial cycle. But, even that can be upset by bad legislation and political action, such as the 1844 Bank Act. Marx quotes the banker Guerney's testimony to Parliament.

“"At the end of October (1847) the amount of bank-notes in the hands of the public was £20,800,000. At that period there was great difficulty in getting possession of bank-notes in the money-market. This arose from the alarm of not being able to get them in consequence of the restriction of the Act of 1844. At present [March 1848] the amount of bank-notes in the hands of the public is ... £17,700,000, but there being now no commercial alarm whatsoever, it is much beyond what is required. There is no banking house or money-dealer in London, but what has a larger amount of bank-notes than they can use."” (p 526)

That is the usual feature of a credit crunch, because everyone demands payment in cash, rather than on credit, whilst everyone also tries to hold on to the cash they have. The problem is not an absolute shortage of liquidity, but a relative shortage of liquidity, given that credit no longer acts to replace money as means of circulating commodities.

On this basis, a higher value and volume of commodities to be circulated may actually require less money in circulation. That is because this higher value and volume of commodities may be an indication of a period of prosperity, during which time, firms are happy to sell on the basis of credit. At the least, it will require relatively less money, in circulation, compared to the value of commodities.

For the banks and finance houses, this is also reflected in their own description of such conditions. When the banks have relatively low reserves, because they have put a lot of notes out into circulation, this is considered to be a period when money is tight, and interest rates are likely to be high. Engels comments,

“As long as the state of business is such that returns of loans made come in regularly and credit thus remains unshaken, the expansion and contraction of circulation depend simply upon the requirements of industrialists and merchants. Since gold, at least in England, does not come into question in the wholesale trade and the circulation of gold, aside from seasonal fluctuations, may be regarded as rather constant over a long period of time, the note circulation of the Bank of England constitutes a sufficiently accurate measure of these changes. In the period of stagnation following a crisis, circulation is smallest; with the renewed demand, a greater need for circulating medium develops, which increases with rising prosperity; the quantity of circulating medium reaches its apex in the period of over-tension and over-speculation — the crisis precipitously breaks out and overnight bank-notes which yesterday were still so plentiful disappear from the market and with them the discounters of bills, lenders of money on securities, and buyers of commodities.” (p 527)
That was the situation that arose in 1847 and 1857, and also in 2008, as a period of speculation leads to a crisis, and the bursting of the bubble. Initially, in 1847 and 1857, the Bank Act  caused the credit crunch by forcing the Bank of England to reduce liquidity. That was remedied by the suspension of the Bank Act. In 2008, central banks quickly ended the credit crunch by providing the necessary liquidity, but having done so they tried to protect the interests of the owners of fictitious capital, at the expense of real capital, by continuing to pump out liquidity, via QE, so as to reflate the asset price bubbles, which had been the basis of the financial crisis in the first place.  I described this in my book, Marx and Engels Theories of Crisis.

“"During an alarm," says the earlier mentioned banker Wright (loc. Cit., No. 2930), "the country requires twice as much circulation as in ordinary times, because the circulation is hoarded by bankers and others."” (p 527)

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