“... in reality the separation of the Bank into two independent departments deprived its management of the possibility of freely utilising its entire available means at critical times, so that situations could arise in which the banking department might be on the verge of bankruptcy while the issue department still had intact several millions in gold and, in addition, its entire 14 million in securities. And this could take place so much more easily since there is a period in almost every crisis when heavy exports of gold take place which must be covered in the main by the metal reserve of the bank. But for every five pounds in gold which then go abroad, the domestic circulation is deprived of a five-pound note, so that the quantity of circulating medium is reduced precisely at a time when the largest quantity is most needed. The Bank Act of 1844 thus directly induces the entire commercial world forthwith to hoard a reserve fund of bank-notes at the outbreak of a crisis; in other words, to accelerate and intensify the crisis. By such artificial intensification of demand for money accommodation, that is, for means of payment at the decisive moment, and the simultaneous restriction of the supply the Bank Act drives the rate of interest to a hitherto unknown height during a crisis. Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis.” (p 554-5)
So, when the crop failure occurred, gold flowed out of the country, to pay for the imported food. Yet, this was no reason that the domestic currency circulation should have been curtailed. But, that was precisely what the Bank Act required. Notes were taken out of circulation, and as a result, a credit crunch ensued, as anyone who had notes or coins hoarded them. As a result, the demand for credit rose, whilst the preparedness to give it declined, forcing interest rates up, thereby causing asset prices and commodity prices to fall, and so leading to economic contraction. A similar thing occurred with the constriction of the supply of currency to Greece in 2015, which meant that people sought to take cash from ATM's to hoard, and thereby created a further shortage of currency, and constriction of economic activity.
“Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis. In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time.” (p 555)
This is the evidence that these were primarily financial rather than economic crises. They are the same kind of financial crisis that Marx described in Capital I, Chapter 3. I have described this in more detail, setting out the different types of crisis analysed by Marx and Engels in my book, Marx and Engels' Theories of Crisis.
“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.” (Capital, I, Chapter 3, note 1 p 137)
As Engels points out,
“... the 1844 legislation still shows traces recalling the first twenty years of the 19th century, the period when specie payments were suspended and notes devaluated. The fear that notes may lose their credit is still plainly in evidence. But this fear is quite groundless, since even in 1825 the issue of a discovered old supply of one-pound notes, which had been taken out of circulation, broke the crisis and proved thereby that the credit of the notes remained unshaken even in times of the most general and deepest mistrust. And this is quite understandable; for, after all, the entire nation backs up these symbols of value with its credit.” (p 555)
In large part, this is correct. That fear arose because the private banks issued notes way beyond what they could cover, thereby leading to bankruptcy as a result of a bank run. The fact that the state now stood behind the Bank of England, although it was still a private bank, removed the possibility of a bank run. It was, in fact, the provisions of the Bank Act which created the potential for the Banking Department to go bankrupt.
However, as the experience of the Weimar Republic demonstrated, the fact that the state stands behind this money printing does not prevent the value of the money tokens being destroyed, or the credit of the state itself being undermined, if that state prints money on a massively extended scale, in excess of the needs of circulation.
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