Capital III, Chapter 35 - Part 8

In reality, even if the pound falls relative to the Euro or other currencies, this may not result in a higher value of exports and lower value of imports. For example, Britain is highly dependent on imports of food and fuel. If the value of the pound falls against the dollar, in which many of these commodities are priced, Britain will still need to import the same quantity, but now at this higher price. So the value of imports will rise not fall. This is part of the so called “J” Curve effect, whereby, as a result of a change in the exchange rate, the balance of trade may move in the opposite direction of that required, for a time, before the necessary adjustments occur. In the past, when Britain was a significant manufacturer, it also depended on large quantities of imported materials. A fall in the value of the pound might only mean that the sterling price of these materials rose, and this higher input cost would also then be passed on into the cost of the end product.

Moreover, to the extent that imported commodities are wage goods, these higher domestic prices raise the value of labour-power, and thereby reduce surplus value. Today, this is significant because large quantities of wage goods are imported from China. Over the last thirty years, this has acted to reduce the value of labour-power, but now, productivity growth in China is slowing, whilst wages are rising. Although Chinese manufactured commodities remain competitive as against similar commodities produced in Europe, so there is little chance of import substitution, their prices are rising and will rise more in domestic currency terms, if the pound and Euro fall against the Renminbi.

This means significant pressure on inflation will rise. Now, as in the time Marx and Engels were writing, the solution to this situation is then to raise the interest rate. Although the myth has been created that central banks dictate the interest rate, as Marx has described above, it is the price of money-capital, and thereby determined by the market, not by central bank planners. As inflation rises, the suppliers of money-capital automatically demand higher rates of interest to cover themselves against the future reduced value of their capital, and the interest paid on it.

“When the drain on gold is considerable, the money-market as a rule becomes tight, that is, the demand for loan capital in the form of money significantly exceeds the supply and the higher interest rate follows quite naturally from this; the discount rate fixed by the Bank of England corresponds to this situation and asserts itself on the market.” (p 575)

Engels describes the situation where there is a gold drain not due to a trade deficit, but due to investment or loans by Britain made in gold. This would not justify any rise in the interest rate. In this case,

“... the Bank of England must then first "make money scarce," as the phrase goes, through heavy loans in the "open market" and thus artificially create a situation which justifies, or renders necessary, a rise in the interest rate; such a manoeuvre becomes more difficult from year to year.” (p 575)

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