Capital III, Chapter 34 - Part 8

Marx summarises the view of Tooke on the provisions of the Act, as he gave them to the Committee on Distress. The separation of the Bank into two departments had resulted in greater fluctuations in the interest rate than had occurred during the crises of 1837 and 1839. Tooke argues that the safety of the bank notes on both these occasions, as well as during the crisis of 1825, was not in doubt. In 1825, it was only the actions of the country banks in printing excessive quantities of £1 notes, that had undermined them, and led to a demand for gold. But, that was itself removed once the Bank of England itself began to issue £1 notes.

“In November and December 1825 not the slightest demand existed for gold for export purposes (3023). 

"In point of discredit at home as well as abroad, a failure in paying the dividends and the deposits would be of far greater consequence than the suspending of the payment of the bank-notes (3028)." 

"3035. Would you not say that any circumstance, which had the effect of ultimately endangering the convertibility of the note, would be one likely to add serious difficulty in a moment of commercial pressure? — Not at all." 

"In the course of 1847 ... an increased issue from the circulating department might have contributed to replenish the coffers of the Bank, as it did in 1825" (3058).” (p 557)

This emphasises the point that in 2008, the injection of additional liquidity, to overcome a credit crunch, that threatened commodity circulation, is valid and necessary, but the continual injection of liquidity to prevent the bursting of bubbles, and the bankruptcy of the banks, is not.

Confirming Tooke's testimony, Marx quotes the testimony of Newmarch, who commented that as a result of the division into two departments, the Banking Department operated within only a portion of its previous reserve. Consequently, whenever even a small reduction in that reserve occurred, it had to increase the discount rate.

“The alterations since 1844" [until June 1857] "have been some 60 in number, whereas the alterations prior to 1844 in the same space of time certainly did not amount to a dozen.” (p 557)

The evidence of a former Bank of England Governor, Palmer, shows that had the Act been in operation earlier, it would have resulted in the bankruptcy of the bank.

“In December 1825, there was about £1,100,000 of bullion remaining in the Bank. At that period it must undoubtedly have failed in toto, if this Act had been in existence" [meaning the Act of 1844]. "The issue in December, I think, was 5 or 6 millions of notes in a week, which relieved the panic that existed at that period.” (p 557)

But, had the Act been in operation, the Bank would have been bankrupt in 1837 and 1839.

“The Act of 1844 would have prevented the Bank giving assistance to the American trade in 1837." — "831. There were three of the principal American houses that failed. ... Almost every house connected with America was in a state of discredit, and unless the Bank had come forward at that period, I do not believe that there would have been more than one or two houses that could have sustained themselves.” (p 558)

Palmer goes on to confirm the point made earlier, that the Act unnaturally restricted the circulation.

“The establishment of an artificial limitation of the powers of the Bank under the Act of 1844, instead of the ancient and natural limitation of the Bank's powers, namely, the actual amount of its specie, tends to create artificial difficulty, and therefore an operation upon the prices of merchandise that would have been unnecessary but for the provisions of the Act.” (p 558)

Palmer was asked what was the purpose of restricting the reserve of silver to a fifth of the total to which he replied that he could not answer that question.

But, Marx responds,

“The purpose was to make money dear; aside from the Currency Theory, the separation of the two bank departments and the requirement for Scottish and Irish banks to hold gold in reserve for backing notes issued beyond a certain amount had the same purpose. This brought about a decentralisation of the national metal reserve, which decreased its capability of correcting unfavourable exchange rates. All the following stipulations aim to raise the interest rate: that the Bank of England shall not issue notes exceeding 14 million except against gold reserve; that the banking department shall be administered as an ordinary bank, forcing the interest rate down when money is plentiful and driving it, up when money is scarce; limiting the silver reserve, the principal means of rectifying the rates of exchange with the continent and Asia; the regulations concerning the Scottish and Irish banks, which never require gold for export but must now keep it under the pretence of ensuring an actually illusory convertibility of their notes. The fact is that the Act of 1844 caused a run on the Scottish banks for gold in 1857 for the first time. Nor does the new bank legislation make any distinction between a drain of gold abroad or for domestic purposes, although it goes without saying that their effects are quite different. Hence the continual large fluctuations in the market rate of interest.” (p 558-9)

Palmer continued that there was no reason for the rate of interest to have risen above 5%, and had it not been for the Act, the Bank could have easily discounted all first class bills presented to it. However, as a result of the Act,

“... "there was no rate of interest which the Bank could have charged to houses of credit, which they would not have been willing to pay to carry on their payments" [1022]. 

And this high interest rate was precisely the purpose of the Act.” (p 559)

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