Chapter 2.2 – Medium of Exchange, C. Coins and Tokens of Value - Part 18 of 22

As Marx points out, Ricardo had only ever seen this kind of financial crisis, the first crisis of overproduction only appearing in 1825. Its why he he was led into accepting Mill's Law of Markets/Say's Law that it is impossible for there to be a general overproduction of commodities. In a crisis of overproduction of commodities, its second form does appear as a payments crisis, as sellers cannot sell, and, thereby, obtain currency, and without such currency cannot pay suppliers bills or wages, which, in turn, leads to a sharp fall in aggregate demand, not to mention the bankruptcy of all those businesses, which, not having been paid, cannot replace their consumed capital.

So, as Marx says, this overproduction of commodities has the appearance of a lack of money, rather than an overproduction of commodities. It appears as under-consumption, rather than overproduction, and the under-consumption is the result of a lack of money. This is basically the thesis of Sismondi, plagiarised by Malthus, and of Attwood as adopted later by Keynes, and today MMT. But, as Marx points out, such overproduction usually occurs when consumption is at its height, when prices have previously risen substantially, and when money abounds. It is the rise in money prices, along with rising demand, that leads to rising levels of production, as firms compete for their share of this increasing market, and the money profits that go with it.

However, the increased money profits are a function of idealised prices. In other words, they are the money profits they expect if they sell all their output at these ideal prices. And, dependent upon the phase of the long wave cycle, such anticipation may be entirely warranted. After 1843, the global economy entered a new long wave uptrend. More workers were employed, more wage goods were bought, aggregate demand rose, encouraging higher capital accumulation. At the same time, as China was opened up, it provided large new markets for manufactured goods. This was interrupted by the financial crisis of 1847, but, as Marx describes, this was not primarily a crisis of overproduction. On the contrary, it was sparked by a crisis of under production resulting from crop failures, and compounded by the idiocy of the 1844 Bank Act, which prevented the currency being expanded, leading to a credit crunch, until the act was suspended. It was further compounded by the bursting of the bubble in railway and other shares, as interest rates rose.

However, its nature as a financial crisis, rather than an economic crisis, is illustrated by the fact that, once the act was suspended, the crisis ended, even without additional liquidity, and the boom resumed until around 1865. An almost identical crisis arose in 1857, following the end of the Crimean War, and was again ended with a similar suspension of the Bank Act. The global financial crisis of 2008 was again of this nature, rather than being an economic crisis, resulting from an overproduction of commodities or capital. I set this out in my book – Marx and Engels Theories of Crisis.

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