John Stuart Mill commented that the prices of securities fell. That follows naturally as the prices of this fictitious capital is determined by their capitalised revenue. This meant foreign buyers would come in to buy bonds, shares etc. and British owners of foreign securities would sell them, to buy the now cheaper British alternatives. The consequence would be an influx of gold for these purchases.
“"2182. A large and rich class of bankers and dealers in securities, through whom the equalisation of the rate of interest and the equalisation of commercial pressure between different countries usually takes place ... are always on the look out to buy securities which are likely to rise.... The place for them to buy securities will be the country which is sending bullion away."” (p 575)
J.G. Hubbard made a similar point, and when asked whether this didn't mean that countries that sold securities to foreigners on this basis, were thereby in considerable debt to them commented,
“Very largely.” (p 576)
Similarly today, the US and other western economies are very largely in debt to China and other surplus economies that have bought large quantities of their securities.
Marx then sets out how Britain used its dominant position to recoup losses from other countries, when the rate of exchange with Asia was unfavourable. The US does something similar today, in being able to use the role of the dollar as global reserve currency. Marx also sets out the difference between the export of precious metal, as money-capital and the export of other commodities.
“... Mr. Wilson once again makes the foolish attempt here to identify the effects of the export of precious metal on the rates of exchange with the effect of the export of capital in general upon these rates; the export being in both cases not as a means of paying or buying, but for capital investment.” (p 576-7)
On the one hand, if Britain sends £10 million to India, as precious metal, or in iron rails, as an investment in Indian railways, this represents a movement of capital. In both cases there is no immediate equivalent return of value. The only return of value is the longer term revenue that results from this investment. However, if the conditions described previously exist, where it is only the marginal movement of money-capital, which is required to affect interest rates, then the transfer of precious metal will have a different consequence than the shipment of rails, precisely because the precious metal is loanable money-capital, but the iron rails are not.
The reason precious metal is sent to India, is because the demand for bills of exchange, drawn on India, exceed their supply. In other words, not enough British commodities have been sold to India to generate a sufficient trade surplus, so that the investment could be balanced against it. For example, country A sells £100 million of commodities to country B, and draws bills of exchange against B to this amount. Country A says, I will invest £100 million in country B's railways. But, instead of country A having to make any payment to country B, it simply sets it off against the bills of exchange. However, if country A invests £120 million in B's railways, it will have to ship £20 million to country B to cover the difference.
As a result, this has an effect on the exchange rate, not because A is in debt to B, but because, in the short term, it is making these large payments. These payments to cover investments are conducted on the capital account rather than the current account. As I pointed out recently, these movements of capital can have what appear to be perverse consequences at first sight. For example, the mechanism described above is that where the central bank raises interest rates, to raise the value of the currency, it causes a reduction in the value of the country's financial assets, which then attracts an inflow of capital, as speculators seek the higher yield now offered by those assets.
However, over the last 25 years, those speculators have come to seek capital gain rather than yield, and they have been encouraged in that view by the action of central banks who have continually intervened to ensure that the prices of those financial assets only ever rise. So, when a central bank raises interest rates, or is thought to be about to raise interest rates, it can cause an outflow of funds, as speculators fear that they may make significant capital losses on the fictitious capital they own, at a time, when the amount of yield they obtain is negligible anyway. So, they may take money out of that country and place it elsewhere, where they think that the central bank is about to cut rates, and boost the prices of fictitious capital. So, we have seen several occasions where, having cut official interest rates, the value of the currency has risen, rather than fallen.
However, over the last 25 years, those speculators have come to seek capital gain rather than yield, and they have been encouraged in that view by the action of central banks who have continually intervened to ensure that the prices of those financial assets only ever rise. So, when a central bank raises interest rates, or is thought to be about to raise interest rates, it can cause an outflow of funds, as speculators fear that they may make significant capital losses on the fictitious capital they own, at a time, when the amount of yield they obtain is negligible anyway. So, they may take money out of that country and place it elsewhere, where they think that the central bank is about to cut rates, and boost the prices of fictitious capital. So, we have seen several occasions where, having cut official interest rates, the value of the currency has risen, rather than fallen.
“In the long run, such a shipment of precious metal to India must have the effect of increasing the Indian demand for English commodities, because it indirectly increases the consuming power of India for European goods. But, if the capital is shipped in the form of rails, etc., it cannot have any influence on the rates of exchange, since India has no return payment to make for it. Precisely for this reason, it need not have any influence on the money-market.” (p 577)
Marx makes the point that this causes an increased demand for British commodities, here, only because Britain was the major manufacturing economy. But, of course, an influx of money-capital into an economy of this kind may result in increased consumption that benefits a range of economies, including the domestic economy. For example, as this increased money-capital began to circulate in India, there is no reason that the increased consumption could not have simply been met by domestic producers. Its not that the country supplying the additional money-capital is automatically the beneficiary of the level of consumption, only that here Britain would have been likely to have benefited, and part of the reason for that would also have been the reduction in the value of the Pound relative to the Rupee, as a result of the transaction, i.e. British commodities would have become cheaper in Rupees.
“But, if the capital is shipped in the form of rails, etc., it cannot have any influence on the rates of exchange, since India has no return payment to make for it. Precisely for this reason, it need not have any influence on the money-market.” (p 577)
In other words, if Britain invests £10 million in Indian railways, by the transfer of money-capital, and this money-capital is used to buy rails produced in India, this money circulates in India, as wages and profits, rents and taxes etc., to those involved in producing the rails, and those producing commodities sold to them. However, if Britain invests £10 million in Indian railways by producing the rails themselves, no such circulation of money-capital in India occurs. But, similarly, there is no increased Indian consumption of British commodities nor any effect on the exchange rate, because no transfer of money-capital has occurred.
“Wilson seeks to establish the existence of such an influence by declaring that such an extra expenditure would bring about an additional demand for money accommodation and would thus influence the interest rate. This may be the case; but to maintain that it must take place under all circumstances is totally wrong. No matter where the rails are shipped and whether laid on English or Indian soil, they represent nothing but a definite expansion of English production in a particular sphere. To contend that an expansion of production, even within very broad limits, cannot take place without driving up the interest rate, is absurd. Money accommodation, i.e., the amount of business transacted which includes credit operations, may grow; but these credit operations can increase while the interest rate remains unchanged. This was actually the case during the railway mania in England in the forties. The interest rate did not rise. And it is evident that, so far as actual capital is concerned, in this case commodities, the effect on the money-market will be just the same, whether these commodities are destined for foreign countries or for domestic consumption. It could only make a difference when capital investments by England in foreign countries exerted a restraining influence upon its commercial exports, i.e., exports for which payment must be made, thus giving rise to a return flow, or to the extent that these capital investments are already general symptoms indicating the over-expansion of credit and the initiation of swindling operations.(p 577-8)
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