Friday, 20 May 2016

Capital III, Chapter 35 - Part 2

The movement of precious metals between economies, to cover differences in the balance of payments, is only significant in terms of a gold drain to the extent of the net amount. Moreover, this net movement of gold is not just a question of covering an imbalance of trade between the two countries. Britain could export more to the US than Britain exports to the UK. This might seem to require that the US ship gold to the UK, to cover the difference. But, it could be that Britain ships gold to the US, because Britain might make investments in the US, for example, in railroads, or else Britain could make loans to the US. These loans and investments would be made in gold.

Any attempt to restrict note supply, in relation to the metal reserve, would be bound to fail, because without a complete centralisation of all banking activity, it would be impossible to know what the metal reserve was, as gold and silver could be sitting in the vaults of a multitude of small banks. Moreover, it would be impossible to know how much of that reserve had been consumed by additional luxury production or released from it.

A gold drain occurs when gold continues to flow out of the country continuously over a prolonged period, so that the reserves drop towards the minimum levels set in law to determine the issuing of notes and coins.

“In 1847, the lowest gold reserve level of the Bank of England, occurring on October 23, showed a decrease of £5,198,156 as compared with that of December 26, 1846, and a decrease of £6,453,748 as compared with the highest level of 1846 (August 29).” (p 567)

The metal reserve has three functions.

“... 1) reserve fund for international payments, in other words, reserve fund of world-money; 2) reserve fund for alternately expanding and contracting domestic metal circulation; 3) reserve fund for the payment of deposits and for the convertibility of notes (this is connected with the function of the bank and has nothing to do with the functions of money as such). The reserve fund can, therefore, also be influenced by conditions which affect every one of these three functions.” (p 567-8)

The size of the reserve, however, is not regulated by these functions, because it can swell simply as a result of a stagnation in economic activity, which results in realised surplus value simply being accumulated in money deposits, rather than invested in productive-capital, and also result in a reduced requirement for circulation, so that coins flow back into the banks.

The fund will rise or fall in response to movements in the balance of payments. If notes come to replace coins, then there is less need for the reserve to fulfil the second function, and gold and silver will flow abroad. If convertibility of these notes into gold, along with the convertibility of deposits into gold, is maintained, and if a legal minimum of reserves is established, to cover such conversion, then this will have an effect on determining the level of the reserve.

“If the circulation were purely metallic and the banking system concentrated, the bank would likewise have to consider its metal reserve as security for the payment of its deposits, and a drain of metal could cause a panic such as was witnessed in Hamburg in 1857.” (p 568)

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