In the critique of political economy which became his life work Marx set out, as he put it in the Preface to the first German edition of Capital, to "lay bare the economic law of motion of modern society" .One of his conclusions was that the expansion of production under capitalism did not proceed at a smooth, steady pace, but was "a series of periods of moderate activity, prosperity,
overproduction, crisis and stagnation" (Capital Vol I, Pelican, p.58), in which the long-term trend was nevertheless upwards. The crisis which marked the end of the period of boom took the form of a financial crash - that is, a collapse of credit and a strong demand to be paid in cash. This gave rise to the illusion that the crisis was simply a monetary question whereas in fact the monetary crisis was a reflection of the real overproduction that had taken place. Overproduction reflected itself as a monetary crisis, since, in the middle of the 19th century, the main form of credit was the trade bill, or bill of exchange, a promise to pay issued by a manufacturer or merchant which would be honoured when he had sold his product. Such bills could be discounted, that is, cashed below their face-value, the precise deduction depending on the going rate of interest (discount rate). In normal times these bills circulated alongside bank notes as an accepted means of payment.
Clearly, if overproduction has taken place, all the bills are not going to be able to be honoured, so that as soon as people realise - or even suspect, with or without reason - that overproduction has taken place they will no longer be prepared to accept these bills in payment and will insist on cash. Nor will banks be prepared to discount the bills, except at a very high rate of interest. The result is a credit squeeze, high interest rates and a financial crisis. Marx studied two of these crises in close detail, that of 1847 - when just after arriving in London in 1850 he was investigating the relationship between crises and revolution - and that of 1857. In fact, by co-incidence, 1857, besides being a crisis year, also saw the publication of two British parliamentary reports on financial questions: the secret evidence taken by a House of Lords committee which investigated the 1847 crisis and a House of Commons report on the workings of the 1844 Bank Act. Marx replied on these two documents, together with the House of Lords report itself which had been published, without the evidence, in 1848 and a report on the 1857 crisis published in 1858, to write a considerable number of articles for the New York Daily Tribune in 1857 and 1858 as well as to make notes for the section of Volume III of Capital to be devoted to interest-bearing capital. Marx had also frequently written on financial subjects before 1857 for the NYDT, especially when a financial or industrial crisis seemed about to break out. He always commented on the British budget when it was presented to the House of Commons
and as early as 1853 had written an article explaining the principles and working of the 1844 Bank Act to his American readers.
Since, in the end, Marx never got round to preparing for publication these notes he made for Capital - they were very scrappy and had to be put into some sort of order by Engels - it is these NYDT articles which must be regarded as expressing in a final form for publication his views on financial crises. Hence these articles are to be regarded as an important complement to Volume III of Capital.
The British banking laws of 1844 and 1845 which Marx analysed in detail were an attempt to put into practice the doctrine of the so-called Currency School. In 1797, at the beginning of the Napoleonic Wars, the convertibility of Bank of England notes into gold had been suspended and was not restored until 1819. As a result of the experience of this period of inconvertibility a controversy arose in the first part of the 19th century over whether or not the number of paper notes issued by banks should be controlled by legislation. The Currency School argued that it ought to be, in order to ensure that the circulation of paper notes conformed to what they believed to be the economic laws governing the circulation of a metallic currency (gold and/or silver). Their opponents, known as the Banking School, denied the need for such control
arguing that, as long as the paper notes were ultimately convertible into a fixed amount of gold, the number that would in actual practice circulate would always be governed by the economy's need for currency. It was thus impossible, in their view, for the number of convertible paper notes to be over-issued since if more were issued that the economy needed the surplus notes would eventually find their way back, one way or another, to the bank that had issued them.
The Currency School based their theory on the views expressed by Ricardo on the circulation of a metallic currency like gold. According to Ricardo, there was a direct causal relationship between the amount of gold in a particular country and the general level of prices prevailing there. When a country had a favourable balance of trade, with exports exceeding imports, there would be an inflow of gold to that country; this increased quantity of gold would lead to an increase in the general price level; exports would therefore tend to fall off and imports to increase; as the balance of trade shifted from favourable to unfavourable so gold would flow out of the country, bringing about a fall in prices again. In other words, according to Ricardo, with a metallic currency the amount of money in circulation was automatically regulated by the flow of gold into and out of a country as its trade balance changed one way or the other.
overproduction, crisis and stagnation" (Capital Vol I, Pelican, p.58), in which the long-term trend was nevertheless upwards. The crisis which marked the end of the period of boom took the form of a financial crash - that is, a collapse of credit and a strong demand to be paid in cash. This gave rise to the illusion that the crisis was simply a monetary question whereas in fact the monetary crisis was a reflection of the real overproduction that had taken place. Overproduction reflected itself as a monetary crisis, since, in the middle of the 19th century, the main form of credit was the trade bill, or bill of exchange, a promise to pay issued by a manufacturer or merchant which would be honoured when he had sold his product. Such bills could be discounted, that is, cashed below their face-value, the precise deduction depending on the going rate of interest (discount rate). In normal times these bills circulated alongside bank notes as an accepted means of payment.
Clearly, if overproduction has taken place, all the bills are not going to be able to be honoured, so that as soon as people realise - or even suspect, with or without reason - that overproduction has taken place they will no longer be prepared to accept these bills in payment and will insist on cash. Nor will banks be prepared to discount the bills, except at a very high rate of interest. The result is a credit squeeze, high interest rates and a financial crisis. Marx studied two of these crises in close detail, that of 1847 - when just after arriving in London in 1850 he was investigating the relationship between crises and revolution - and that of 1857. In fact, by co-incidence, 1857, besides being a crisis year, also saw the publication of two British parliamentary reports on financial questions: the secret evidence taken by a House of Lords committee which investigated the 1847 crisis and a House of Commons report on the workings of the 1844 Bank Act. Marx replied on these two documents, together with the House of Lords report itself which had been published, without the evidence, in 1848 and a report on the 1857 crisis published in 1858, to write a considerable number of articles for the New York Daily Tribune in 1857 and 1858 as well as to make notes for the section of Volume III of Capital to be devoted to interest-bearing capital. Marx had also frequently written on financial subjects before 1857 for the NYDT, especially when a financial or industrial crisis seemed about to break out. He always commented on the British budget when it was presented to the House of Commons
and as early as 1853 had written an article explaining the principles and working of the 1844 Bank Act to his American readers.
Since, in the end, Marx never got round to preparing for publication these notes he made for Capital - they were very scrappy and had to be put into some sort of order by Engels - it is these NYDT articles which must be regarded as expressing in a final form for publication his views on financial crises. Hence these articles are to be regarded as an important complement to Volume III of Capital.
The British banking laws of 1844 and 1845 which Marx analysed in detail were an attempt to put into practice the doctrine of the so-called Currency School. In 1797, at the beginning of the Napoleonic Wars, the convertibility of Bank of England notes into gold had been suspended and was not restored until 1819. As a result of the experience of this period of inconvertibility a controversy arose in the first part of the 19th century over whether or not the number of paper notes issued by banks should be controlled by legislation. The Currency School argued that it ought to be, in order to ensure that the circulation of paper notes conformed to what they believed to be the economic laws governing the circulation of a metallic currency (gold and/or silver). Their opponents, known as the Banking School, denied the need for such control
arguing that, as long as the paper notes were ultimately convertible into a fixed amount of gold, the number that would in actual practice circulate would always be governed by the economy's need for currency. It was thus impossible, in their view, for the number of convertible paper notes to be over-issued since if more were issued that the economy needed the surplus notes would eventually find their way back, one way or another, to the bank that had issued them.
The Currency School based their theory on the views expressed by Ricardo on the circulation of a metallic currency like gold. According to Ricardo, there was a direct causal relationship between the amount of gold in a particular country and the general level of prices prevailing there. When a country had a favourable balance of trade, with exports exceeding imports, there would be an inflow of gold to that country; this increased quantity of gold would lead to an increase in the general price level; exports would therefore tend to fall off and imports to increase; as the balance of trade shifted from favourable to unfavourable so gold would flow out of the country, bringing about a fall in prices again. In other words, according to Ricardo, with a metallic currency the amount of money in circulation was automatically regulated by the flow of gold into and out of a country as its trade balance changed one way or the other.
source: http://www.worldsocialism.org/spgb/overview/finance.pdf
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