As Marx notes in Capital III, quoting testimonies to parliamentary committees on the Bank Act, and the financial crisis of 1847, the Bank of England could control note issuance, meaning that it created an artificial shortage of currency, which would encourage a credit crunch, by tending to make firms require cash rather than credit, and, as they sought to obtain cash, by having bills discounted, this raised the discount rate. However, as various testimonies stated, in a period of rapid economic growth, where firms were keen to be able to expand, and so extend commercial credit to customers, and similarly, obtained such credit from their suppliers, the reduced note issuance by the Bank is simply replaced by an increases quantity of commercial credit, in the form of Bills of Exchange, etc.
“"5306. If there should not be currency to settle the transactions at the clearing house, the only next alternative which I can see is to meet together, and to make our payments in first-class bills, bills upon the Treasury, and Messrs. Smith, Payne, and so forth." — "5307. Then, if the government failed to supply you with a circulating medium, you would create one for yourselves? — What can we do? The public come in, and take the circulating medium out of our hands; it does not exist." — "5308. You would only then do in London what they do in Manchester every day of the week? — Yes."”
In times of declining activity, that may not happen, but, in times of economic expansion, the commercial credit expands automatically. For, example, if A normally sells £100 of commodities, per month, to B, giving them 30 days to pay the invoice, when activity increases, and B buys £150 a month from A, with still the same 30 days to pay, that is an automatic increase in commercial credit of 50%. Similarly, A will increase their purchases of materials etc., from their suppliers, also obtained on commercial credit. But, also, as activity expands, and revenues to firms expand, as payments from increased sales flow in, they may also feel it is worthwhile to extend the grace period for payment, to encourage additional sales, obtain additional customers, and so on.
In Theories of Surplus Value, Chapter 21, Marx examines the work of Hodgskin. Hodgskin, a working-class advocate, was keen to downplay the role of capital, and highlight the role of labour. Arguing against the notion that profits were the consequence of saving up, by capitalists, of those commodities required as means of production and means of consumption, he notes, in relation to the circulating capital, rather than it consisting of saved up commodities it consists of co-existing labour. In other words, he says, the bread the worker consumes, each day, had usually been baked by labour on the same day, and that was true of many such commodities.
Marx pursues this analysis to demonstrate that the accumulation of circulating capital does not occur as a build up of such stocks, which, whilst rising absolutely, decline relatively, but as precisely this expansion of coexisting labour. The labourers producing outputs in one sphere are simultaneously producing inputs, used by coexistent labour, in other spheres. The accumulation of circulating capital, thereby, consists of an expansion of this coexistent labour, including the production of the increased mass of wage goods required by an expanding number of workers. In economies, where, now, 80% of employment, new value and surplus value production comes from service industry, this is even more clearly the case.
In such periods, as with those faced today, as against the stagnation in the 1980's, attempts to curtail this credit, by central banks, will face significant obstacles. Reducing note issuance, M0, and bank credit, may have little impact on this commercial credit, which operates outside it. Restrictions on bank credit may impact consumer borrowing, but, in periods of expansion, workers have more wages (even if hourly wage rates fail to keep up with inflation) and savings (which higher inflation encourages them to use for consumption) to use for day to day spending. Higher borrowing rates, or tighter credit may impact spending on large items, such as the purchase of houses, but, in such periods, the consequence, then, is to cause asset prices not consumer prices to fall.
Similarly, firms may have more profit to use to fund capital accumulation, but may also resort to share or bond issuance to obtain money-capital. Again, the consequence of the higher rates is to impact these asset prices, as an increase in supply of these assets reduces their price, and, in respect of shares means that, for any given amount of profit, earnings per share is reduced, so that for any given price-earnings multiple, share prices are reduced. It is then asset prices not commodity prices that are reduced. So, in these conditions, when a central bank seeks to reduce consumer prices by reducing currency, it might only be able to do so by raising its rates, and restricting bank credit to such a severe degree as to cause a recession. But, a) that may simply result in stagflation, and b) it would cause asset prices to fall catastrophically long before consumer prices.
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