Capital III, Chapter 34 - Part 5

Given that we have today seen so many crises of overproduction, in the last two hundred years, its difficult for us to understand that, at the time, in the first half of the nineteenth century, such crises were incomprehensible, both to many economists, and to industrialists, precisely because they had never been seen before. There had been money crises, and it was partly because of these that measures like the Bank Act were designed.

But, as Marx and Engels point out, the first crisis of overproduction does not arise until 1825, some four hundred years into the development of capitalist production, and seventy-five years into the Industrial Revolution. It is the qualitative change in the capacity for production that the introduction of the steam engine, along with other machine production brings about, which turns what until then had been only a potential for crisis into a necessity.  I have set this out in my book "Marx and Engels' Theories of Crisis".

Engels writes,

“The crisis of 1837 with its protracted aftermath, followed in 1842 by a regular post-crisis, and the self-interested blindness of industrialists and merchants, who absolutely refused to see any over-production — for such a thing was absurd and impossible according to vulgar economy — had ultimately achieved that confusion of thought which enabled the Currency School to put its dogma into practice on a national scale. The bank legislation of 1844 and 1845 was passed.” (p 554)

Engels then gives a summary of its provisions and consequences. The act divided the Bank of England into an Issue Department and a Banking Department. The Issue Department took in securities of £14 million, as well as holding the gold and silver reserves. The silver reserve was limited to a quarter of the total reserve. It then issued notes to the full value of the total.

Of this circulation, a portion would be in the hands of the public, and the remainder was held by the Banking Department, which together with a small amount of coin, constituted its reserve, which could be increased or reduced in line with the requirements of circulation.

This Issue Department took in gold, and gave out bank notes in exchange. So, for example, an exporter, who sold commodities overseas, might receive gold in payment. They would then deposit this gold with the bank, who would then issue them with bank notes. In the same way, an importer, who required gold to pay for commodities, might hand over bank notes to the Issue Department and obtain the gold they required in exchange.

The other transactions, such as the discounting of bills, to obtain Bank of England bank notes, for example, were conducted by the Banking Department. At this time, private banks were still allowed to issue their own bank notes. If one of these banks ceased doing so, the Bank of England was enabled to increase its own unbacked issue by two-thirds. On this basis, the Bank of England issue rose from £14 million to £16.5 million in 1892.

“Thus, for every five pounds in gold which leave the bank treasury, a five-pound note returns to the issue department and is destroyed; for every five sovereigns going into the treasury a new five-pound note comes into circulation. In this manner, Overstone's ideal paper circulation, which strictly follows the laws of metallic circulation, is carried out in practice, and by this means, according to the advocates of the Currency Theory, crises are made impossible for all time.” (p 554)

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