Commercial Crises and Currency in Britain (1858)

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This article was preceded by Marx's report which is entered in his Notebook for 1858 as "27 Friday. China. Peace treaty. Russia. 'Times'". It was heavily edited and published in the New York Daily Tribune, No. 5428, September 14, 1858 as a leading article. Owing to the Tribune editors' interference, the report became purely informative and lost features typical of Marx's articles, it has therefore not been included in this volume.

As for the article in question, it is entered in the Notebook for 1858 as "10 Tuesday Bankact".

In his letter to Engels of September 21, 1858, Marx mentions a letter written by a Tribune reader in connection with this article and published in the newspaper on September 4 under the signature "A bullionist". Marx writes: "Along comes a banker, a self-styled 'bullionist', and writes a letter to the Tribune in which he I. says that never has so comprehensive a summary of the whole subject been penned, etc., but 2. raises all kinds of objections and invites the editors to reply. So reply the poor devils must and indeed very sad work they made of it".

Here is what the banker wrote about the article: "A more comprehensive summary of banking, credit currency, prices and fluctuations, was probably never penned." The author makes "a few suggestions on the general subject and on the use of terms which are not generally understood". He goes on to say that "with the increase of currency, prices rise; with its decrease, they fall", therefore it is the duty of the banks to regulate the amount of currency in the country. He concludes: "I entertain the 'vulgar notion' that over-issues of bank-notes set in motion an over-issue of bank credits, inflate prices, ruin our home industry, produce disastrous fluctuations, prostrate the business and industrial occupations of the great masses of the people, and tend to divide our population into two great divisions—a very few men of princely wealth on the one hand, and a nation of poverty-stricken laborers or dependents on the other."

The Tribune's reply in the same issue of the newspaper deals with particular questions concerning money circulation: the dependence of export and prices on the currency, the relation of import and export in countries with paper and metallic currency.

There is, perhaps, no point in Political Economy in which there exists more popular misapprehension than on the power which banks of issue are commonly supposed to wield, of affecting general prices through an expansion or contraction of currency. The idea that the banks had unduly expanded the currency, thus producing an inflation of prices violently to be readjusted by a final collapse, is too cheap a method of accounting for every crisis not to be eagerly caught at. The question, be it understood, is not whether banks may be instrumental in fostering a fictitious system of credit; but whether they possess the power of determining the amount of circulation in the hands of the public.

A principle which is not likely to be contested is, that the interest of every bank of issue prompts it to keep in circulation the greatest possible amount of its own notes. If any bank can be supposed to join the power to the will, it is certainly the Bank of England. Now, if we consider the period from 1844 to 1857, for instance, we shall find that, except in times of panic, the Bank, notwithstanding the privilege of throwing its notes into the market by the purchase of public stocks, and notwithstanding successive reductions in the rate of interest, has never been able to keep its notes in circulation up to the legal margin. But there is another phenomenon more striking still. During the period from 1844 to 1857, the general commerce of the United Kingdom has perhaps trebled. British exports we know to have been doubled during the last ten years. But, concurrently with this immense increase of trade, the circulation of the Bank of England has actually diminished, and still continues gradually to decline. Take the following figures:

	Exports.	Circulation of Notes.
1845	£60,110,000	£20,722,000
1854	97,184,000	20,709,000
1856	115,826,000	19,648,000
1857	122,155,000	19,467,000

Thus, with exports increasing by £62,045,000, the circulation has fallen by £1,255,000, though during the same period, by dint of the Bank Act of 1844, the number of branches of the Bank of England was increasing, that of the country banks of issue competing with it was decreasing, and its own notes were converted into legal tenders for country banks. It might perhaps be supposed that the gold coin, supplied from new and fertile sources, was instrumental in displacing part of the Bank of England notes, by filling channels of circulation which these notes formerly occupied. In fact, Mr. Weguelin, in 1857 Governor of the Bank of England, stated to the Committee of the House of Commons that, on the part of the most competent persons, the increase in the gold currency for the six years then last elapsed was estimated at 30 per cent. The total gold circulation he believed now to amount to £50,000,000. This addition to the gold coin, however, was so little connected with the diminution of the paper currency, that on the contrary, the smaller denominations of notes, £5 and £10 notes, the only ones which could be superseded by coin in the retail trade and in the circulation going on between traders and consumers, have actually increased in number simultaneously with the increase of the metallic currency. The proportions of such increase are represented by the following table:

	Notes of £5 and £10.	Per cent of total Note circulation.
1845	£9,698,000	46.9
1854	10,565,000	51.0
1855	10,628,000	53.6
1856	10,680,000	54.4
1857	10,659,000	54.7

The diminution has thus been limited to the higher descriptions of bank notes, notes of £200 to £1,000 performing functions of domestic circulation from which coin, properly so called, is almost shut out. Such was the saving effected in the use of those notes that, notwithstanding the extension of commerce, the general rise of prices, and the increase in the small paper currency, the aggregate note circulation went on gradually declining. From £5,856,000, to which they had amounted in 1852, the number of bank notes of £200 to £1,000 had sunk to £3,241,000 in 1857. While in 1844 they still formed 26 per cent, they furnished in 1854 but 20.5, in 1855 but 17.5, in 1856 but 16.9, and in 1857 but 16.7 per cent of the total circulation.

This new feature in the paper currency of Great Britain arose from the growing competition of the London joint-stock banks with the private banks, and from the accumulation of vast sums in their hands, consequent upon their practice of allowing interest on deposits. On the 8th of June, 1854, after a long but vain resistance, the London private bankers saw themselves forced to admit the joint-stock banks to. the arrangements of the clearing-house, and, shortly after, the final clearing was adjusted in the precincts of the Bank of England. The daily clearances being now effected by transfers in the accounts kept by the several banks in that establishment, the large notes formerly employed by the bankers for the adjustment of their mutual accounts, lost a vast field of employment, and were consequently in great part thrown out of circulation. Meanwhile the nine joint-stock banks of London had increased their deposits from £8,850,774 in 1847 to £43,100,724 in 1857, as shown in their published accounts. Whatever influence, therefore, banks may have exercised upon the general tendency of trade, and upon prices, must have been effected by the management of their deposits, that is, by credit operations, instead of by an over-issue of notes, which they proved unable to keep up even to the old margin of circulation.

How little of real money, of Bank of England notes and gold, enters into the wholesale transactions of British trade, may be conclusively inferred from an analysis, forwarded to the Commons Committee by Mr. Slater, a member of one of the largest London firms, of a continuous course of commercial operations, extending over several millions yearly. The proportions of receipts and payments are reduced to the scale of £1,000,000 only, for the year 1856, and read as follows:

RECEIPTS.
In Bankers' drafts and Bills of Exchange payable after date	£533,596
In checks on Bankers payable on demand	357,715
In country Bankers' notes	9,627
Total	£900,938
In Bank of England notes	£68,554
In gold	£28,089
In silver and copper	1,486
In Post-Office orders	933
Total	£99,062
Grand total	£1,000,000
PAYMENTS.
By Bills of Exchange, payable after date	£302,674
By Checks on London Bankers	663,672
Total	£966,346
By Bank of England notes	£22,743
By gold	9,427
By silver and copper	1,484
Total	£33,654
Grand total	£1,000,000

These figures may be taken as an illustration of the British wholesale trade, which centers in London. It is here shown that of money received, Bank of England notes amount to less than 10 per cent, and gold and silver to only 3 per cent of the currency. Of the payments made, Bank of England notes are but 2 per cent, and gold and silver only 1 per cent of the currency. On the other hand, payments are received in a ratio of about 90 per cent, and are made at nearly 97 per cent in that portion of the currency formed by the credit and the capital of the traders themselves.

From an analysis of the issues of the New-York banks—say for the last six years we must arrive at the same conclusion, viz.: that the amount of notes in circulation is beyond the control of the banks themselves, and was actually contracting during the very epoch when trade expanded, and general prices underwent a process of inflation, resulting in a collapse. The vulgar notion, therefore, which refers the recent crisis, and crises generally, to an over-issue of bank notes, must be discarded as altogether imaginary.