The Vienna Note.
The United States and Europe.
Letters from Shumla. Peel's Bank Act.[236]

That the Russian Emperor will reject the Turkish "alterations" there is not the slightest doubt. Already, we are informed by the Assemblée nationale, the Paris Moniteur of the Emperor of Russia, that,

"according to correspondences received to-day at Paris, the first impressions produced on the Cabinet of St. Petersburg were by no means favorable to the modifications proposed by the Porte. [...] Whatever may be the resolution of that Cabinet we must prepare ourselves beforehand to take it coolly and to repress our fears. We have to consider that even were the Russian Cabinet to refuse the proposed change of the note, there would remain the resources of fresh negotiation at Constantinople."[c]

The intimation contained in this last hint, that Russia will attempt to gain another delay of the decision of the dispute, is confirmed by the Berlin Lithographic Correspondence:

"The Austrian Government has presented a memorial to the Emperor Nicholas containing new propositions of modification, and it has undertaken to terminate the crisis in a manner quite different from all previous attempts."

In a letter published by the Vienna Wanderer from Odessa dated 26th Aug. the solution of the Oriental question is stated "to be not so near at hand as was expected by some people. The armaments have not been suspended for one day, and the army in the Principalities continually receives reinforcements[d]." The Kronstadt Satellite positively announces. that the Russian troops will take up their winter quarters in the Principalities.

A note issued from Washington could scarcely have produced a greater sensation in Europe than your editorial remarks on Capt. Ingraham[e]. They have found their way, with and without commentaries, into almost the whole weekly press of London, into many French papers, the Brussels Nation, the Turin Parlamento, the Basle Gazette, and every liberal newspaper of Germany. Your article on the Swiss-American alliance having simultaneously been reprinted in a number of German journals, you may consider the following passage from an article of the Berlin Lithographic Correspondence as partly addressed to you:

"Some time since the press has had various occasions to pronounce itself on the United States theory with regard to intervention. Very recently the Koszta affair at Smyrna has renewed the discussion, and this affair is not yet terminated, when already foreign and native journals hold out the prospect of an intervention on the part of the United States in favor of Switzerland, if it should be threatened by an attack. To-day we are informed that several Powers have the intention of making a collective declaration against the doctrine of international right put forth by the United States, and that we may hope to see those Cabinets arrive at a perfect understanding. If the American intervention theories were not refuted in a peremptory manner, the extirpation of the revolutionary spirit in Europe would meet with an insuperable obstacle. We may add, as an important fact, that France is among the Powers ready to participate in this remonstrance."

On this last point, the Constitutionnel of Tuesday last takes good care not to leave any doubt, when it says:

"It is necessary to be candid in all things. It is not as a citizen of the United States that Koszta is defended against Austria by the agents of the American Republic, but as a revolutionist. But none of the European Powers will ever admit as a principle of public law that the Government of the United States has the right to protect revolution in Europe by force of arms. On no grounds would it be permitted to throw obstacles in the way of the exercise of the jurisdiction of a government, under the ridiculous pretense that the offenders have renounced their allegiance, and from the real motive that they are in revolt against the political constitution of their country. The Navy of the American Union might not always have such an easy triumph, and such headstrong conduct as that pursued by the Captain of the St. Louis might on another occasion be attended with very disastrous consequences."[f]

The Impartial of Smyrna, received to-day, publishes the following interesting letters from Shumla:

Shumla, Aug. 8, 1853

"On the 13th, the English General O'Donnell arrived from Constantinople. He had an interview of two hours' duration with Omer Pasha, and left on the following day, attended by an aide-de-camp of the Commander-in-Chief, for the purpose of inspecting the fortifications. Yesterday three batteries and an immense train of ammunition arrived from Varna. To-morrow a reinforcement of one battery, two battalions of infantry, and 1,000 horse, will leave for the port of Rahova[g]. The engineers at this place are busily engaged in restoring the fortifications destroyed by the Russians in 1828. Turkey may have unbroken confidence in her army."

The Earl of Fitzwilliam addressed a letter on Thursday last to the meeting of Sheffield cutlers, in which he protests against the monstrous assumption with which Parliament was closed by the heroic Palmerston, that "reliance was to be placed on the honor and character of the Emperor of Russia."

Mr. Disraeli has summoned his constituents to meet him at Aylesbury on the 14th inst. The Daily News of yesterday attempted, in a long and dull article, to combat what Mr. Disraeli is supposed by it to be likely to tell his electors. Such a performance I think The Daily News might have left with greater propriety to its venerable grandsire, the London Punch.

It is now the fourth time since January, that the rate of interest has been raised by the Bank of England. On Sept. 4, it was fixed at 4 per cent.

"Another attempt has been made to reduce the circulating medium of the country—another effort to arrest the tide of national prosperity,"

exclaims the London Sun[h]. On the other hand, it comforts itself with the consideration that the Bank of England has lost much of its mischievous power in consequence of the Peel Act of 1844.[238]

The Sun is mistaken in what it fears, and in what it hopes. The Bank of England has as little as any other bank either the power of expanding or of contracting the currency of the country. The really mischievous powers possessed by it are by no means restricted, but on the contrary strengthened by the Peel Act of 1844.

As the Bank Act of 1844 is generally misunderstood, and as its working will become, in the approaching crisis, of paramount importance not only to England but to the whole commercial world, I propose briefly to explain the tendency of the act.

Peel's Bank Act of 1844 proceeds on the assumption that the metallic circulation is the normal one; that the amount of the currency regulates prices; that in the case of a purely metallic circulation, the currency would expand with a favorable exchange and with an influx of bullion, while it would be contracted by an adverse exchange and a drain of bullion; that a circulation of bank notes has exactly to imitate the metallic circulation; that accordingly there had to be a degree of correspondence between the variations in the amount of bullion in the vaults of the Bank of England and the variations in the quantity of its notes circulating among the public; that the issue of notes must be expanded with a favorable, and contracted with an unfavorable exchange; lastly, that the Bank of England had the control over the amount of its notes in circulation.

Now there is not one of these premises which is not utterly fallacious and contradictory to facts. Suppose even a purely metallic circulation, the amount of currency could not determine prices, no more than it could determine the amount of commercial and industrial transactions; but prices on the contrary would determine the amount of currency in circulation. Unfavorable exchanges, and a drain of bullion, would not contract even a purely metallic circulation, as they would not affect the amount of currency in circulation, but the amount of currency in reserve, sleeping in the banks as deposits, or in private hoards. On the other hand, a favorable exchange and a concomitant influx of bullion, would augment, not the currency in circulation, but the currency deposited with bankers or hoarded by private individuals. The Peel Act, therefore, starting upon a false conception of a purely metallic circulation, naturally arrives at a false imitation of it by a paper circulation. The idea itself, that a bank of issue has a control over the amount of its outstanding notes, is utterly preposterous. A bank issuing convertible notes or advancing notes generally on commercial securities, has neither the power of augmenting the natural level of circulation nor the power to cripple it by one single note. A bank may certainly issue notes to any amount its customers will accept; but, if not wanted for circulation, the notes will be returned to it in the form of deposits, or in payment for debts, or in exchange for metal. On the other hand, if a bank intend to forcibly contract its issues, its deposits would be withdrawn to the amount needed for filling up the vacuum created in the circulation. Thus a bank has no power whatever over the quantity of circulation, whatever may be its power for the abuse of other people's capital. Although in Scotland banking was practically unrestricted before 1845, and the number of banks had considerably increased since 1825, the circulation declined, and there was only £1 (of paper) per head of population, while there was in England £2 per head, notwithstanding that the whole circulation below £5 was metallic in England and paper in Scotland.

It is an illusion that the amount of circulation must correspond to the amount of bullion. If the bullion increases in the vaults of a bank, that bank certainly tries by all means to extend its circulation, but, as experience teaches, to no purpose. From 1841-'43, the bullion in the Bank of England rose from £3,965,000 to £11,054,000, but its total circulation declined from £35,660,000 to £34,094,000. Thus the Bank of France had, on March 25, 1845, an outstanding circulation of 256,000,000 f., with a bullion reserve of 234,000,000 f.; but on March 25, 1846, its circulation was 249,404,000 f., with a bullion reserve of only 9,535,000 f.

It is an assumption no less incorrect, that the internal circulation must diminish in the case of a drain of bullion. At this moment, for instance, while the efflux of bullion is going on, $3,000,000 have been brought to the mint and added to the circulation of the country.

But the main fallacy rests on the supposition that demand for pecuniary accommodation, i.e. loan of capital, must converge with demand for additional means of circulation; as if the greater amount of commercial transactions were not effected by bills, checks, book-credits, clearing-houses, and other forms of credit quite unconnected with the so-called circulation. There can exist no better mode of verifying the facility of bank-accommodations than the market rate of interest, and no more efficient means for ascertaining the amount of business actually done by a bank than the return of bills under discount. Let us proceed on this two-fold scale of measurement. Between March and September, 1845, when with the speculation mania the fictitious capital reached its utmost height and the country was inundated with all possible enterprises on an immense scale, the rate of interest being nearly 2½ per cent., the circulation of bank notes remained nearly stationary, while at a later period in 1847, the rate of interest being 4½ per cent., the price of shares having sunk to the lowest ebb, and discredit spreading in all directions, the circulation of bank notes reached its maximum.

The note circulation of the Bank of England was £21,152,853 on the 17th April; £19,998,227 on the 15th of May; and £18,943,079 on the 21st of August, 1847. But while this falling off in the circulation occurred, the market rate of interest had declined from 7 and 8 to 5 per cent. From the 21st Aug., 1847, the circulation increased from £18,943,079 to £21,265,188 on Oct. 23. At the same time the market rate of interest rose from 5 to 8 per cent. On the 30th of October the circulation was £21,764,085, the interest paid in Lombard-st. amounting to 10 per cent. Take another instance:

So that the banking accommodation in April, 1847, greater by 6,000,000 than that of Sept., 1846, was carried on with a less amount of circulation.

Having exposed the general principles of Peel's Bank Act, I come now to its practical details. It assumes that £14,000,000 of bank notes form the necessary minimum amount of circulation. All notes issued by the Bank of England beyond that amount shall be represented by bullion. Sir Robert Peel imagined he had discovered a self-acting principle for the issue of notes, which would determine with mechanical accuracy the amount of the circulation, and which would increase or diminish [it] in the precise degree in which the bullion increased or decreased. In order to put this principle into practice, the Bank was divided into two departments, the Issue Department and the Banking Department, the former a mere fabric of notes, the latter the true Bank, receiving the deposits of the State and of the public, paying the dividends, discounting bills, advancing loans, and performing in general the business with the public, on the principles of every other banking concern. The Issue Department makes over its notes to the Banking Department to the amount of £14,000,000, plus the amount of bullion in the vaults of the Bank. The Banking Department negotiates those notes with the public. The amount of bullion necessary to cover the notes beyond £14,000,000, remains in the Issue Department, the rest being surrendered to the Banking Department. If the amount of bullion diminish beneath the circulation exceeding £14,000,000, the notes returning to the Banking Department in discharge of its advances, or under the form of deposits, are not reissued nor replaced, but annihilated. If there were a circulation of £20,000,000, with a metallic reserve of £7,000,000, and if the Bank were further drained by an efflux of £1,000,000, all the bullion would be requested by the Issue Department, and there would not remain one sovereign in the Banking Department.

Now everybody will understand that this entire machinery is illusory on the one hand, and of the most pernicious character on the other hand.

Take, for instance, the Bank returns in last Friday's Gazette[i]. There you find, under the head of the Issue Department, the amount of notes in circulation stated to be £30,531,650, i.e., £14,000,000+£16,962,918—the latter sum corresponding to the bullion reserve of last week. But, turning to the head of Banking Department, you will find £7,755,345 in notes in its assets. This is the portion of the £30,531,650 not accepted by the public. Thus the self-acting principle determines only the £30,531,650 in notes to be transported from the Issue Department to the Banking Department. But there they remain. As soon as the Banking Department comes into contact with the public, the amount of circulation is regulated, not by Peel's Act, but by the wants of business. The self-acting principle, accordingly, extends its operation not beyond the vaults of the Bank premises.

On the other hand, there occur moments, when the Bank of England, by her exceptional position, exercises a real influence, not only on English commerce, but on the commerce of the world. This happens in moments of general discredit. In such moments the Bank may, by raising in accordance with the Peel Act its minimum rate of interest, correspondingly with the efflux of bullion, and by refusing her accommodation, depreciate the public securities, lower the prices of all commodities, and enormously aggravate the disasters of a commercial crisis. It may, in order to stop the efflux of bullion and to turn the exchanges, transform every commercial stagnation into a monetary peril. And in this manner the Bank of England has acted and was forced to act by the Peel Act in 1847.

This, however, is not all. In every banking concern, the heaviest liabilities are not the amount of notes in circulation, but the amounts of notes and metals in deposit. The banks of Holland, for instance, had, as Mr. Anderson stated before a Committee of the House of Commons, before 1845, £30,000,000 in deposit, and £3,000,000 only in circulation.

"In all commercial crises," says Mr. Alex. Baring, "for instance, in 1825, the claims of the depositors were the most formidable, not those of the holders of notes."

Now, while the Act of Peel regulates the amount of bullion to be held in reserve for the convertibility of notes, it leaves Directors the power to do with the deposits as they please. Yea, more. The very regulations of this act, as I have shown, may force the Banking Department to stop the payment of the deposits and of the dividends, while bullion to any amount may lie in the vaults of the Issue Department. This happened, indeed, in 1847. The Issue Department being yet possessed of £61,000,000 of bullion, the Banking Department was not saved from bankruptcy but by the interference of Government suspending, on their responsibility, the Peel Act, on 25th Oct., 1847.

Thus the result of the Peel Act has been that the Bank of England changed its rate of interest thirteen times during the crisis of 1847, having changed it only twice during the crisis of 1825; that it created amid the real crisis a series of money panics in April and October, 1847; and that the Banking Department would have been obliged to stop but for the stoppage of the act itself. There can, therefore, exist no doubt that the Peel Act will aggravate the incidents and severity of the approaching crisis.

Notes

[238] The Bank Act of 1844 passed by Peel's government established the maximum quantity of bank-notes in circulation guaranteed by definite reserve funds of gold and silver. The additional issue of bank-notes was allowed only if precious metal reserves were increased proportionally. The Act was violated several times by the government itself, in particular, during the monetary crises of 1847 and 1857. Besides this article, Marx gave an analysis of the meaning and significance of the 1844 Act in a series of articles written in 1857-58 for the New-York Daily Tribune (see present edition, Vols. 15 and 16). A detailed description of the Act is given in Marx's Capital, Vol. III, Ch. XXIV.