Thursday, 19 May 2016

Capital III, Chapter 35 - Part 1

Precious Metal and Rate of Exchange

“It should be noted in regard to the accumulation of notes in times of stringency, that it is a repetition of the hoarding of precious metal as used to take place in troubled times in the most primitive conditions of society. The Act of 1844 is interesting in its operation because it seeks to transform all precious metal existing in the country into a circulating medium; it seeks to equate a drain of gold with a contraction of the circulating medium and a return flow of gold with an expansion of the circulating medium. As a result, the experiment proved the contrary to be the case.” (p 565)

On the one hand, for most of the period after the act was passed, less notes were issued than were allowed. On the other, in 1857, when the crisis required additional liquidity, the maximum allowed was not enough. There are two aspects of the flow of precious metals, internationally, that were examined in Capital II. Those between economies to cover the balance of payments differences, and those between commodity producing economies and those that are the producers of precious metals.

Before the Californian and Australian gold rushes, of the 19th century, gold production was more or less just adequate to ensure the replacement of worn out coins, and for the production of luxury articles. Silver was used to cover trade with Asia, which expanded in the 19th century, both from Europe and from the Pacific coast of the US. That silver was largely replaced, as these additional supplies became available.

Some of the additional gold was also absorbed into the domestic currency circulation. Marx quotes the testimony of Newmarch, and it is surprisingly similar to the kind of thing seen today in financial markets that have come to rely on the latest injection of additional liquidity from central banks.

“"1509. At the close of 1853, there was a considerable apprehension in the public mind, and in September of that year the Bank of England raised its discount on three occasions... In the early part of October there was a considerable degree of apprehension and alarm in the public mind. That apprehension and alarm was relieved to a very great extent before the end of November, and was almost wholly removed, in consequence of the arrival of nearly £5,000,000 of treasure from Australia... The same thing happened in the autumn of 1854, by the arrival in the months of October and November of nearly £6,000,000 of treasure. The same thing happened again in the autumn of 1855, which we know was a period of excitement and alarm, by the arrivals, in the three months of September, October and November, of nearly £8,000,000 of treasure; and then at the close of last year, 1856, we find exactly the same occurrence. In truth, I might appeal to the observation almost of any member of the Committee, whether the natural and complete solvent to which we have got into the habit of looking for any financial pressure, is not the arrival of a gold ship" [B. A. 1857].” (Note 14, p 566)

About £30 million of gold was added to Britain's circulation up to 1857, and gold reserves of all central banks in Europe and the US increased. Part of the reason for this was that after the financial panic of 1857, there was a period of economic stagnation. So coins came out of circulation, and were put in bank deposits. The increased supply of gold reduced its value, and created additional wealth, which in turn caused an increased demand for luxury items, which absorbed some of the additional gold in its production.

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