In other words, Marx and Engels' objection was not what Martin presents it as being, but that, in fact, the demand for currency had increased, and the Bank Act prevented it being satisfied, causing a credit crunch, and consequent financial crisis that spilled into the real economy, as interest rates spiked, and the circulation of commodities was disrupted. On the basis of Marx's theory, the amount of money rose (because the total value of commodities rose, due to the crop failure), requiring, also, a greater amount of currency in circulation, but the Bank Act prevented it, because, at the same time, gold flowed out of the country.
That was most obvious in 1847, because the crop failures of that year had caused the value of agricultural products to rise sharply. Agricultural products did not just form the largest component of workers' consumption, but they also formed a large part of the constant capital consumed in the production of industrial commodities, and so passed into the value of all other commodities. On the basis of Marx's theory, as set out in A Contribution to the Critique of Political Economy, the amount of money in circulation is determined by MV = PT. In other words, the average value of commodities per transaction, P, multiplied by the number of transactions, T, (or put another way, the total value of commodities to be circulated). M equals the value of the standard of prices (e.g. 1 gram of gold), and V equals the average number of transactions it performs in a year.
So, if the unit value of commodities (P) rises, then PT will rise unless T falls by a greater proportion than the rise in P. If T does fall, then V will also tend to fall, because, as Marx describes, V is also a function of T, as well as of other technical conditions, such as the speed by which the banking and financial system can process payments. Generally, therefore, a rise in P, due to a fall in social productivity, such as with a major crop failure, means that the total value of commodities to be circulated increases, so that its money equivalent also rises, and this requires more, not less, money in circulation as currency.
But, in order to compensate for the physical shortages of agricultural products, caused by the crop failure, Britain imported agricultural products and food from Europe, and paid for it with gold. The Bank Act required liquidity to be reduced, in line with this reduction in gold reserves, at the very time when more liquidity was required, not less. That resulted in the credit crunch, described above, which was quickly ended, as Engels describes, not even requiring a significant injection of liquidity.
“In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time.”
Marx and Engels' concern, here, had nothing to do with liquidity and inflation/deflation, and everything to do with the restriction of liquidity leading to a credit crunch and financial crisis! Its quite true, as I will discuss later, that Marx says that interest rates are not lowered by increasing liquidity, because a) increased liquidity causes inflation, and so affects equally both sides of the demand-supply equation, and b) this demand-supply is not for money, but for money-capital. However, money-capital necessarily takes the form of money itself, and if money in circulation is curtailed, creating a credit crunch, this, of itself, creates an artificial demand for money-capital, now, not to finance capital accumulation, but simply to make payments, and so causes interest rates to rise.
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