| Author(s) | Friedrich Engels |
|---|---|
| Written | 25 February 1851 |
TO MARX IN LONDON
[Manchester,] Tuesday, 25 February [1851]
Dear Marx,
A week ago yesterday I sent you a letter for Harney[1] and have had no answer from you since; this might put me in a bit of a quandary if a letter from Harney, which may arrive any day, should require a speedy answer, or if the new Chartist clique here succeeds in negotiating a visit by Harney, and one fine morning I find he has turned up at the pub. I hope that you received everything safely and that it's not ill-health that is preventing you from writing. Perhaps you don't care for the letter or the way I acted off my own bat without further consultation with you. But that was precisely why I sent it to you, and if there had been anything you took exception to, nothing could have been simpler than to let Harney know he wasn't to print my article[2] for the time being, and to return me the letter with marginal comments, which you know would have had all due attention.
In any case, I have long owed you an answer to the currency business.[3] In my opinion the thing as such is perfectly correct and will go a long way towards reducing the crazy theory of circulation to simple and lucid fundamental facts. As regards the exposition in your letter I have only the following remarks to make:
1. Given that, at the beginning of a period of pressure the Bank of England accounts show, as you say, £12,000,000 deposits and £8 million bullion or coin. In order to get rid of the surplus £4 million bullion, you suggest it [the Bank] should lower the discount rate. I don't believe that it needs to do this, and as far as I remember the discount rate has never yet been lowered at the beginning of the pressure. In my view the pressure would immediately affect the deposits and very soon not only establish an equilibrium between bullion and deposits, but also compel the Bank to raise the discount rate so that the bullion would not fall below ⅓ of the deposits. To the extent that pressure increases, the circulation of capital, the turnover of goods will stagnate. Once bills have been drawn, however, they mature and have to be honoured. Hence the reserve capital—the deposits—has to be set in motion—not qua currency, as you will appreciate, but qua capital, and thus the simple drain of bullion, combined with pressure, will of itself suffice to rid the Bank of its surplus bullion. This takes place without the Bank having to lower its rate of interest under circumstances which simultaneously raise the general interest rate throughout the country.
2. In a period of growing pressure, it seems to me, the Bank (so as not to get into difficulties) must increase the proportion of bullion to deposits to the same extent that pressure increases. The 4 surplus millions would be a boon and a blessing, and the Bank would release them as slowly as possible. With increasing pressure, according to your assumptions, a proportion of bullion to deposits of the order of ⅔:1, ½:1 and even ⅗:1 would be in no way excessive, and, all the easier to bring about as, with the decrease of deposits, the bullion reserve would also decrease in absolute terms, though relatively speaking it would increase. In this case a run on the Bank is just as possible as with paper money and may be induced by perfectly normal commercial conditions without any ruinous effect on the Bank's credit.
3. 'The currency is the last to be affected', you say. Your own assumptions that it is affected as a result of stagnating commercial activity, and that then, of course, less currency is required, lead to the conclusion that the currency contracts simultaneously with commercial activity, and that part of it becomes surplus to the extent that pressure increases. Admittedly it is only at the end, in a condition of high pressure, that it contracts perceptibly. But looked at as a whole this process is well under way from the beginning of the pressure, even though this cannot be factually demonstrated in detail. But in so far as this superseding of part of the currency is a consequence of the other commercial conditions, of pressure which is independent of the currency, and all other commodities and commercial conditions are affected before the currency, and also in so far as in practice the currency is the last to be sensitive to this decrease, so it will, indeed, be the last to be affected by the crisis.
These comments, as you see, are entirely confined to your modus illustrandi;[4] the thing itself is quite unexceptionable.
Your
F. E.