Capital III, Chapter 35 - Part 3

In most cases, except perhaps 1837, Marx says, the actual economic crisis does not break out until after exchange rates have been affected, and the gold drain occurs. The reason for that was described earlier. Country A overproduces and over exports to country B. The commodities remain on the market in country B, unsold, so payment for them does not flow back to country A. But, in the meantime, country A, which has been booming, under the illusion of the overproduction, continues to consume. It continues to pull in imports from country B, and elsewhere, as its fully employed workers spend their higher wages, the capitalists spend their higher profits, and the recipients of interest, rent and taxes do the same.

But, without a flow of payments to cover its imports, country A must pay with gold.

“In 1825, the real crash came after the drain on gold had ceased. In 1839, there was a drain on gold, but it did not bring about a crash. In 1847, the drain on gold ceased in April and the crash came in October. In 1857, the drain on gold to foreign countries had ceased in early November, and the crash did not come until later that same month. 

This is particularly evident in the crisis of 1847, when the drain on gold ceased in April after causing a slight preliminary crisis, and the real business crisis did not come until October.” (p 568)

The consequence is a rise in interest rates and a money panic, as the bank seeks to reverse the drain. Then, as this affects domestic economic activity, even as gold flows into the country, there can be a drain to meet the needs of domestic circulation, as firms seek means of payment,and there is increased money hoarding.

Marx quotes the following as evidence.

“J. Morris, Governor of the Bank of England: 

Although the rate of exchange favoured England since August 1847, and an import of gold had taken place in consequence, the bullion reserve of the Bank decreased.

"£2,200,000 went out into the country in consequence of the internal demand" (137). — This is explained on the one hand by an increased employment of labourers in railway construction, and on the other by the "circumstance of the bankers wishing to provide themselves with gold in times of distress" (147).” (p 569)

Once crises have subsided, gold flows between countries re-establishing previous equilibrium conditions. The size of the reserve, in each country, tends to reflect its importance in the global economy.

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