 Of 1845 the same work says: [meaning, as we shall presently see, idle money-capital rather than means of circulation F.E.] The following extracts are also taken from the parliamentary Report on Commercial Distress, 1847-48. Owing to the crop failure and famine of 1846-47 large-scale imports of foodstuffs became necessary. Russell's letter suspended the Bank Act. The previously mentioned Charles Turner testifies: The aforementioned S. Gurney said : In 1847 England paid at least 9 million gold to foreign countries for imported foodstuffs. Of this amount 7 million came from the Bank of England and 1 million from other sources (p. 245). Morris, Governor of the Bank of England: Again Morris, when questioned by Lord G. Bentinck: Now to the commentaries on such heroism. Disraeli questions Mr. W. Cotton, a Director and former Governor of the Bank of England: Mr. Pease, a country banker, had the following to say concerning hoarding in banks during the crisis of 1847: How much a money-dealer takes advantage of times of crisis is revealed by Tooke: Let us now take another parliamentary report cited earlier: Report of Select Committee on Bank Acts, communicated from the Commons to the Lords, 1857 (quoted further as B. C. 1857). In it Mr. Norman, Director of the Bank of England and a leading figure among the champions of the Currency Principle, is interrogated as follows: This self-complacent rubbish is quite fitting for this pillar of the Currency Principle. First, the brilliant discovery that bank-notes or gold are means of buying something, and that they are not borrowed for their own sake. And this is advanced to explain that the rate of interest is regulated but by what? By the demand and supply of commodities, which heretofore was known to regulate only the market-prices of commodities. However, very different rates of interest are compatible with the same market-prices of commodities. But now this cunning. He is confronted with the correct remark: "But interest is paid for the money," which, of course, contains the implication: "What has interest received by the banker, who does not deal in commodities at all, to do with these commodities? And do not manufacturers receive money at the same rate of interest, although they invest it in widely different markets, hence in markets with widely different conditions of demand and supply for the commodities used in production?" All that this celebrated genius has to say in reply to these questions is that if the manufacturer buys cotton on credit "the difference between the ready-money price and the credit price at the time at which he is to pay for it is the measure of the interest." Quite the contrary. The prevailing rate of interest whose regulation the great intellect Norman was asked to explain is the measure of the difference between the cash price and the credit price until payment is due. First the cotton is to be sold at its cash price, and this is determined by the market-price, itself regulated by the state of supply and demand. Say the price 1,000. This concludes the transaction between the manufacturer and the cotton broker so far as buying and selling is concerned. Now comes a second transaction. This is one between lender and borrower. The value of 1,000 is advanced to the manufacturer in cotton, and he has to repay it in money, say, in three months. And three months' interest for 1000, determined by the market rate of interest, makes up the extra charge over and above the cash price. The price of cotton is determined by supply and demand. But the price of the advanced value of cotton, of 1,000 advanced for three months, is determined by the rate of interest. And this fact, that cotton is thus transformed into money-capital, proves to Mr. Norman that interest would exist even if there had been no money. If there were no money at all, there would certainly be no general rate of interest. There is, to begin with, a vulgar conception of capital as "commodities used in production." In so far as these commodities serve as capital, their value as capital, as distinct from their value as commodities, is expressed in the profit which is derived from their productive or mercantile employment. And the rate of profit under all circumstances has something to do with the market-price of the purchased commodities and with their supply and demand, but is determined by entirely different circumstances. And there is no doubt that the interest rate is generally limited by the rate of profit. But Mr. Norman should tell us just how this limit is determined. And it is determined by the supply and demand of money-capital as distinguished from the other forms of capital. It could be further asked: How are demand and supply of money-capital determined? It is doubtlessly true that a tacit connection exists between the supply of material capital and the supply of money-capital; and, likewise, that the demand of industrial capitalists for money-capital is determined by conditions of actual production. Instead of enlightening us on this point, Norman offers us the sage opinion that the demand for money-capital is not identical with the demand for money as such; and this sagacity alone, because he, Overstone, and the other Currency prophets, constantly have pricks of conscience since they are striving to make capital out of means of circulation as such through the artificial intervention of legislation, and to raise the interest rate. Now to Lord Overstone, alias Samuel Jones Loyd, as he is asked to explain why he takes 10% for his "money" because "capital" is so scarce in his country. Voil ce que parler veut dire. [This is what had to be said. Ed.] We shall eventually return to the influence of the quantity of available money on the rate of interest. But it is to be noted right here that Overstone again makes a quid pro quo. The demand for money-capital in 1847 (before October there was no anxiety over money stringency, or the "quantity of money," as he called it) increased for various reasons, such as rising prices for corn and cotton, lack of buyers of sugar due to over-production, railway speculation and the crash, overcrowding of foreign markets with cotton goods, and the forced export to, and import from, India for the purpose of speculation in bills of exchange, which was described above. All these things, over-production in industry and underproduction in agriculture in other words, greatly differing causes gave rise to an increased demand for money-capital, i.e., for credit and money. The increased demand for money-capital had its origin in the course of the productive process itself. But whatever may have been the cause, it was the demand for money-capital which made the interest rate, the value of money-capital, climb. If Overstone means to say that the value of money-capital rose because it rose, then it is tautology. But if, by "value of capital," he means a rise in the rate of profit as the cause of the rise in the rate of interest, we shall immediately see that this is wrong. The demand for money-capital, and consequently the "value of capital," may rise even though the profit may decrease; as soon as the relative supply of money-capital shrinks, its "value" increases. What Overstone wished to prove is that the crisis of 1847, and the attendant high interest rate, had nothing to do with the "quantity of money," i.e., with the regulations of the Bank Act of 1844 which he had inspired; although it was, indeed, connected with them, inasmuch as the fear of exhausting the bank reserve a creation of Overstone contributed a money panic to the crisis of 1847-48. But this is not the issue here. There was a dearth of money-capital, caused by the excessive volume of operations compared to the available means and precipitated by the disturbance in the reproduction process due to a crop failure, over-investment in railways, over-production, particularly of cotton goods, swindling operations in trade with India and China, speculation, superfluous sugar imports, etc. What the people, who had bought corn at 120 shillings per quarter, lacked when it fell to 60 shillings, were the 60 shillings which they had overpaid and the corresponding credit for that amount in Lombard Street advances on the corn. It was by no means a lack of bank-notes that prevented them from converting their corn into money at its old price of 120 shillings. The same applied to those who had imported an excess of sugar, which became almost unsaleable. It applied likewise to the gentlemen who had tied up their floating capital in railways and relied on credit to replace it in their "legitimate" business. To Overstone all this signifies a "moral sense of the enhanced value of his money." But this enhanced value of money-capital corresponded directly on the other hand to the depreciated money-value of real capital (commodity-capital and productive capital). The value of capital in the one form rose because the value of capital in the other fell. Overstone, however, seeks to identify these two values of different sorts of capital in a single value of capital in general, and he tries to do so by opposing both of them to a scarcity of the medium of circulation, of available money. But the same amount of money-capital may be loaned with very different quantities of the circulation medium. Take his example of 1847. The official bank-rate stood at 3 to 3 % in January; 4 to 4 % in February. In March it was generally 4%. April (panic) 4 to 7 %. May 5 to 5 %, June, on the whole, 5%. July 5%. August 5 to 5 %. September 5% with trifling variations of 5 , 5 , 6%. October 5, 5 , 7%. November 7-10%. December 7 to 5%. In this case the interest rose because profits decreased and the money-values of commodities fell enormously. If, therefore, Overstone says here that the rate of interest rose in 1847 because the value of capital rose, he cannot mean anything by value of capital but the value of money-capital, and the value of money-capital is the rate of interest, and nothing else. But later he showed the cloven hoof and identified the value of capital with the rate of profit. As for the high rate of interest paid in 1856, Overstone was indeed ignorant of the fact that this was partially a symptom that the credit jobbers were coming to the fore, who paid interest not from their profit, but with the capital of others; he maintained just a few months before the crisis of 1857 that "business is quite sound." He testified furthermore: [B.C. 1857] Here, then, we learn, at last, what the meaning of "value of capital" is. Furthermore, the rate of profit may be high for a lengthy period, and yet the profit of enterprise may fall and the rate of interest rise to a point where it swallows the greater portion of the profit. This is just as logical as if he were to say: The rise in the rate of profit has been in consequence of the rise in commodity-prices by speculation, and to complain that the rise in prices destroys its own cause, namely, speculation, is a logical absurdity, etc. That anything can ultimately destroy its own cause is a logical absurdity only for the usurer enamoured of the high interest rate. The greatness of the Romans was the cause of their conquests, and their conquests destroyed their greatness. Wealth is the cause of luxury and luxury has a destructive effect on wealth. The wiseacre! The idiocy of the present-day bourgeois world cannot be better described than by the respect, which the "logic" of the millionaire the dunghill aristocrat inspired in all England. Furthermore, if a high rate of profit and an expansion of business may be causes of a high interest rate, a high rate of interest is by no means therefore a cause of high profit. The question is precisely whether such a high interest (as was actually discovered during the crisis) continued or, what is more, reached its climax after the high rate of profit had long gone the way of all flesh. What an amazing jumble of words by our logician of usury! Here he comes again with his increased value of capital! He seems to think that this enormous expansion of the reproduction process, hence accumulation of real capital, took place on one side, and that on the other there existed a "capital", for which there arose an "enormous demand", in order to accomplish this gigantic increase of commerce! Was not this enormous increase of production an increase of capital itself, and if it created a demand, did it not also create the supply, and, simultaneously, an increased supply of money-capital? If the interest rate rose very high, then merely because the demand for money-capital increased still more rapidly than its supply, which implies, in other words, that with the expansion of industrial production its operation on a credit basis expanded as well. That is to say, the actual industrial expansion caused an increased demand for "accommodation," and the latter demand is evidently what our banker means by the "enormous demand for capital." It was surely not the expansion of this demand for capital alone, which raised the export business from 45 to 120 million. And furthermore, what does Overstone mean when he says that the country's annual savings swallowed by the Crimean War form the natural source of supply for this big demand? in the first place, how did England achieve accumulation in 1792-1815, which was a far different war from the little Crimean one? In the second place, if the natural source was dry, from what source did capital flow at all? It is well known that England did not request loans from foreign countries. Yet if there is an artificial source besides the natural one, it would have been best for a nation to utilise the natural source in war and the artificial one in business. But if only the old money-capital was available, could it double its effectiveness through a high rate of interest? Mr. Overstone evidently thinks that the country's annual savings (which, however, were supposed to have been consumed in this case) are converted only into money-capital. But if no real accumulation, i.e., expansion of production and augmentation of the means of production, had taken place, what good would there be from the accumulation of debtor's money claims on this production? The increase in the "value of capital" springing from a high rate of profit is identified by Overstone with an increase caused by a greater demand for money-capital. This demand may climb for reasons quite independent of the rate of profit. He himself cites the example of its rise in 1847 as a result of the depreciation of real capital. Depending on what suits his purpose, he ascribes the value of capital to real capital or money-capital. The dishonesty of our banking lord, and his narrow-minded banker's point of view with its didactic flavouring are further revealed in the following: Mr. Overstone declares that it is "impossible" to answer this question. (This question itself lumps together the rate of profit of enterprise with the rate of profit, and. passes over the fact that the rate of profit is the common source of interest and profit of enterprise. The interest rate may leave the rate of profit untouched, but not the profit of enterprise. Overstone replied:) (Yes, if they can do so without ruining themselves. So long as their profit is high, they pay the discount because they wish to, and when it is low, because they have to.) (Halte-l ! because he wants to anticipate the return in money of his tied-up capital and to prevent his business from stopping; because he must meet payments due. He demands more capital only when business is good, or when he speculates on another's capital, though business may be bad. The discount is by no means simply a device to expand business.) This smug logician assumes that bills of exchange are discounted only for the purpose of expanding business, and that business is expanded because it is profitable. The first assumption is wrong. The ordinary businessman discounts, in order to anticipate the money-form of his capital and thereby to keep his process of reproduction in flow; not in order to expand his business or secure additional capital, but in order to balance the credit he gives by the credit he receives. And if he wants to expand his business on credit, discounting bills will do him little good because it is merely conversion of the money-capital which he already has in his hands from one form into another; he will rather take a direct loan for a longer period. The credit swindler will get his accommodation bills discounted to expand his business activity, to cover one squalid business deal by another; not to make profits but to obtain possession of another's capital. After Mr. Overstone has thus identified discounting with borrowing additional capital (instead of with converting bills representing capital into hard cash), he beats an instant retreat as soon as the screws are applied to him. But it is a very unlimited point of view, on the other hand, which enables Mr. Overstone quite suddenly to understand only his, banker's capital, as "capital," and to assume that the man who discounts a bill of exchange with him is a man without capital, just because his capital exists in the form of commodities, or because the money-form of his capital is a bill of exchange, which Mr. Overstone converts into another money-form. (The examiner wishes to press him to explain the rate of interest, so far as it is influenced by the amount of bullion in the Bank, on the basis of the rate of interest, so far as it is influenced by the value of capital.) The examiner, Cayley, unmoved by this poor joke, continues: But what Cayley says is this: If a rise of interest rate together with a contraction of the gold reserve, is an indication of an expansion in business, then a fall of the interest rate together with an expansion of the gold reserve, must be an indication of a contraction of business. Overstone has no answer to this. (Precisely this is the mistake, to conceive money as an instrument; it is a form of capital.) Here he declares point-blank that manufacturers and merchants are not capitalists, and that the capitalist's capital is only money-capital. Here he is stuck. He is then asked whether merchants' bills of exchange represent commodities which have been sold or shipped. He denies that these bills represent the value of commodities in the same way that a bank-note represents gold. (3740, 3741.) This is somewhat insolent. Drawing bills of exchange is converting commodities into a form of credit-money, just as discounting bills of exchange is converting this credit-money into another, namely bank-notes. At any rate, Mr. Overstone admits here that the purpose of discounting is to obtain money. A while ago he said that discounting was a way not of converting capital from one form into another, but of obtaining additional capital. Their purpose is to obtain means of payment for due bills of exchange on themselves, on account of the prevailing lack of credit, so that they will not have to let their commodities go below price. If they have no capital at all themselves, they receive it along with the means of payment, because they receive value without an equivalent. The urge to obtain money as such consists always in the wish to convert value from the form of commodities or creditor's claims into the form of money. Hence, even aside from the crises, the great difference between borrowing capital and discount, the latter being a mere conversion of money claims from one form into another, or into real money. [I take the liberty at this point in my capacity of editor to interpolate a few remarks. With respect to Norman, as well as Loyd-Overstone, the banker is always the one who "advances capital" to others, and his customers are those who demand "capital" from him. Thus, Overstone says that people have bills of exchange discounted through him, "because they wish to obtain the command of capital" (3729), and that it is pleasant for such people if they can "get command of capital at a low rate of interest" (3730). "Money is the instrument for obtaining capital" (3736), and during a panic the great desire of the mercantile community is to "get the command of capital" (3743). For all of Loyd-Overstone's confusion over what capital is, it is at least clear that he designates what the banker gives to his client as capital, as a capital which the client did not formerly possess, but which was advanced to him to supplement what he already possessed. The banker has become so accustomed to act as distributor (through loans) of the social capital available in money-form that he considers every function whereby he hands out money, as loaning. All the money he pays out appears to him as a loan. If the money is directly loaned, this is literally true. If it is invested in the bill-discounting business, it is in fact advanced by himself until the bill becomes due. The notion thus grows on him that all the payments he makes are advances; furthermore, that they are advances not merely in the sense that every investment of money with the object of deriving interest or profit, is economically considered an advance of money which the owner of money concerned, in his capacity of private individual, makes to himself in his capacity as entrepreneur, but advances in the definite sense that the banker lends his client a sum of money which augments the capital already at the latter's disposal. It is this conception, which, transferred from the banker's office to political economy, has created the confusing controversy, whether that which the banker places at his client's disposal in hard cash is capital or mere money, a medium of circulation, or currency. To decide this fundamentally simple controversy, we must put ourselves in the place of a bank client. It all depends on what this customer requests and receives. If the bank allows its client a loan simply on his personal credit, without any security on his part, then the matter is clear. He then certainly receives an advance of definite value as a supplement to the capital he has already invested. He receives it in the form of money; hence, not merely money, but also money-capital. If, on the other hand, he receives the advance against securities, etc., then it is an advance in the sense of money paid to him on condition that he pay it back. But it is not an advance of capital. For the securities also represent capital, and a larger amount at that than the advance. The recipient therefore receives less capital-value than he deposits as security; this represents for him no acquisition of additional capital. He does not enter into the transaction because he needs capital he has that in his securities but because he needs money. Here we, therefore, have an advance of money, not of capital. If the loan is granted by discounting bills, then even the form of an advance disappears. Then it is purely a matter of buying and selling. The bill passes by endorsement into the possession of the bank, while the money passes into the possession of the client. There is no question of any return payment on his part. If the client buys hard cash with a bill of exchange or some similar instrument of credit, it is no more and no less an advance than were he to buy cash money with his other commodities, such as cotton, iron, or corn. Still less can this be called an advance of capital. Every purchase and sale between one merchant and another is a transfer of capital. But an advance of capital occurs only when the transfer of capital is not reciprocal, but unilateral and for a period of time. An advance of capital through discount can, therefore, only occur when a bill is a speculative one, which does not represent any sold commodities, and no banker will take such a bill if he is aware of its nature. In the regular discounting business the bank client does not, therefore, receive an advance, either of capital or of money. What he receives is money for sold commodities. The cases in which the customer demands and receives capital from a bank are thus clearly distinguished from those, in which he merely receives an advance of money, or buys money from the bank. And since least of all Mr. Loyd-Overstone ever advanced his funds without collateral except on the rarest occasions (he was the banker of my firm in Manchester), it is likewise evident that his lyric descriptions of the great quantities of capital loaned by generous bankers to manufacturers in need of capital are gross inventions. By the way, in Chapter XXXII Marx says essentially the same thing: "The demand for means of payment is a mere demand for convertibility into money, so far as merchants and producers have good securities to offer; it is a demand for money-capital whenever there is no collateral, so that an advance of means of payment gives them not only the form of money but also the equivalent they lack, whatever its form, with which to make payment." And again in Chapter XXXIII: "Under a developed system of credit, with the money concentrated in the hands of bankers, it is they, at least nominally, who advance it. This advance refers only to money in circulation. It is an advance of circulation, not an advance of capitals which it circulates." Mr. Chapman, who should know, likewise corroborates this conception of the discounting business: B. C. 1857: We shall, however, return to this subject in Chapter XXVIII. F. E.] (Then comes the old Ricardian theory of money.) (But a moment ago it was capital = money or gold, and a little before that he had explained the rise in interest rate by a high rate of profit, due to an expansion rather than a contraction of business or capital.) (This shrewd banker doubles first the business activity and then the demand for capital with which it is to be doubled. All he sees is his client, who asks Mr. Loyd for more capital by which to double the volume of his business.) Here the fish is caught in the net again. The first difficulty is to discount a bill of exchange, or to obtain a loan against the security of commodities. It is the difficulty of converting capital, or a commercial token of capital into money. And this difficulty is manifested, among other things, in a high rate of interest. But as soon as the money is obtained, what is the second difficulty? Does anyone ever find any difficulty in getting rid of his money when it is merely a matter of paying? And if it is a matter of buying, has anyone ever had any difficulty in purchasing during times of crisis? And, for the sake of argument, should this refer to a specific dearth in corn, cotton, etc., this difficulty could only appear in the price of these commodities, not in the value of money-capital, i.e., not in the rate of interest; and this difficulty is overcome, in the final analysis, by the fact that our man now has the money to buy them. At last we have what he means by capital. He converts money into capital by "entrusting" it, less euphemistically, by loaning it at interest. After Mr. Overstone has stated that a change in the rate of discount is not essentially connected with a change in quantity of the gold reserve in a bank, or in the quantity of available money, but that there is at best only a coincidence in time, he repeats: Here, at last, we have the connection between a high rate of profit and a demand for capital as Overstone conceives it. Now, a high rate of profit prevailed in, for example, 1844-45 in the cotton industry, because raw cotton was cheap, and remained so, whereas the demand for cotton goods was strong. The value of capital (and in an earlier statement Overstone calls capital that which everyone needs in his business), in this case therefore the value of raw cotton, was not increased for the manufacturer. The high rate of profit may have induced some cotton manufacturer to obtain money on credit for the purpose of expanding his business. Thereby his demand rose for money-capital, but for nothing else. This is superlative. The arbitrary provision that the Bank may make out as many paper notes as it has gold in the treasury and 14 million more, implies, of course, that its issue of notes fluctuates with the fluctuations of the gold reserve. But since the present "means of information which we possess" clearly showed that the mass of notes, which the Bank can thus manufacture (and which the issue department transfers to the banking department) that this circulation between the two departments of the Bank of England, fluctuating with the fluctuations of the gold reserve, does not determine the fluctuations in the circulation of bank-notes outside the Bank of England, then the latter the real circulation becomes a matter of indifference to the bank administration, and the circulation between the two departments of the Bank, whose difference from the real circulation is mirrored in the reserve, alone becomes decisive. To the outside world this internal circulation is significant only because the reserve indicates how close the Bank is approaching the legal maximum of its note issue, and how much its clients can still receive from the banking department. The following is a brilliant example of Overstone's mala fides: And with this he retires, but not into the chamber of a student.  
Economic Manuscripts: Capital, Vol.3, Chapter 26